JPMorgan Chase & Co has sold an estimated $25 billion of profitable securities in an effort to prop up earnings after suffering trading losses.
These losses are tied to the bank's now-infamous "London Whale," compounding the cost of those trades.
CEO Jamie Dimon earlier this month said the bank sold corporate bonds and other securities, pocketing $1 billion in gains that will help offset more than $2 billion in losses.
As a result, the bank will not have to report as big an earnings hit for the second quarter.
The sales of profitable securities from elsewhere in the bank's investment portfolio will increase its costs by triggering taxes on the gains and by eliminating future earnings from the securities.
Gains from the sales could provide about 16 cents a share of earnings, about one-fifth of the bank's second-quarter profit, analysts said. But rather than creating new value for investors, the transactions merely shift gains in securities from one part of the company's financial statements to another.
"They really made two stupid decisions," said Lynn Turner, a consultant and former chief accountant of the Securities and Exchange Commission. The first was taking risks with derivatives that they did not understand, Mr Turner said.
"The second is selling assets with high income that they can't replace," Mr Turner added. In a low interest-rate environment, the bank will struggle to generate as much income with the cash it received from selling the securities, he said.
Dimon first disclosed the sales on May 10 when he announced the derivatives losses generated from the bank's London office and trader Bruno Iksil - dubbed the "London Whale" in credit markets due to the size of the trading positions he took. Dimon noted that the bank has another $8 billion of profit it could gain by selling an array of debt securities.
It remains unclear exactly when the bank sold the securities, and the bank has not detailed the value of securities it sold.
Given the drawbacks of the sales, it also is unclear how many more the bank will sell to bolster second-quarter profits.
To be sure, the bank may have additional reasons for making the sales, and the sales do not violate laws nor are they likely to hurt the bank's stability.
A JPMorgan spokeswoman declined to comment beyond the company's public statements.
However, based on disclosures that show the bank has historically realised less than a 4% gain from selling these kinds of securities, JPMorgan would have to sell $25 billion in securities to generate $1 billion in gains, according to a Reuters analysis of the bank's practices.
Taxes on the gains, if calculated at the 38% tax rate that JPMorgan uses to illustrate its business to analysts, would mean a $380 million cost to realize the gains. That would leave a net gain to earnings of $620 million, or 16 cents a share.
Before the sale, the gains would have existed on the bank's books as so-called paper profits, and would have been included on its balance sheet. But when the bank sold and realized the gains, they moved to its income statement as profit.
Yet the bank is under pressure to show strong profits. Its stock has fallen 18% since the day before it disclosed the losses. It closed Friday at $33.50.
The bank currently is expected to report earnings of 90 cents a share for the second quarter, according to analysts surveyed by Thomson Reuters I/B/E/S. That compares with $1.24 a share before the derivatives debacle was disclosed and $1.27 a share that the bank reported a year earlier.
