Thursday, January 15, 2009

Writedowns of $2.9 billion at JPMorgan

JPMorgan is another company to bite the bullet of writing off bad debts. The financial leader took a write off loss of $2.9 billion, rather than pass them on to the Federal government and U.S. taxpayer through the TARP. Various forms of debt were referred to, from bad credit cards and mortgages of consumers to investment portfolios and leveraged business buyouts.

For all the bad news, JPMorgan still managed to eke out a small profit this quarter. It projects the future to remain bleak and its prospects uncertain given the down markets.

It is making the best of efforts in the worst of times. In 2008, while the overall stock market was cut in half, JPMorgan drifted down only 27% in value.

Historical results will surely emerge from the company named after the man credited with saving the U.S. economy of multiple occasions. Yet we also have to be watchful of events even larger than those that could be managed by the Federal Reserve Board, which J.P Morgan Jr. was a founding member of.

At this time in history, we are not sure how bad the news is going to be one to four years from now. We just should be prepared that value in the global economy is being eroded. What was worth billions yesterday is worthless today.

Though we did not have inflation in terms of depreciation of the dollar, we obviously had an inflation of market valuation. We are now having a painful return to more humble values.

Throughout all of the dour and somber market news, I had to laugh, a bit painedly, reading this comment by John Kenneth Galbraith:

One of the things you must understand about 1929 and the antecedent years, as about any speculative episode, is the danger... in attributing intelligence to the simple fact that people are associated with large sums of money or large financial operations. We don't ask whether they're intelligent. We say, they're associated with all this money, so they must be intelligent. We attribute intelligence to association with financial operations. And only afterwards do we discover that error and that the people involved can be extremely successful in gulling themselves. That they can be in effect, and I use the word advisedly, marvelously stupid.

I used to be quite an optimist... I thought that by keeping the memory of the 1929 crash alive we would have a warning against the kind of feckless, fatuous optimism which caused people to get in and shove up the markets and shove it up more and get carried away by the illusion of ever-increasing wealth. I've given up on that hope because we've had it happen too often again since.

The Crash of 1929, PBS’ American Experience, 1990
With books on my shelf with such titles as Barry Carter’s Infinite Wealth, many were the market magicians and prognosticators who were presuming that S-curves had no top, or indeed, that bell curves were all to turn into S-curves, never to come back down.

With $2.9 billion written off, JPMorgan provides proof-positive that wealth is not infinite. It takes time to earn. It takes sustained attention, management, production and maintenance to keep its value. And it is all-too-easily destroyed.

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