Shares of JPMorgan Chase (JPM) rose almost 6% on Friday on news that the bank's loss from its London Whale trade was just $5.8 billion and that revenues of $22.89 billion were above the Wall Street estimate of $21.7 billion.

Frankly, I find the jump in JPMorgan Chase stock deeply disturbing. It's yet one more sign, if you need one, of exactly how cynical Wall Street has become and of how corrupt the world's banking system is.

I can explain the rally in JPMorgan shares. It's the logic of that explanation that I find so profoundly troubling. Especially in the context of the global financial crisis -- remember Lehman Brothers, Countrywide Financial (acquired by Bank of America (BAC) for $4.1 billion in 2008), and American International Group (AIG), rescued with $85 billion in loans by the Federal Reserve and the U.S. Treasury -- and following so closely on the heels of news that Barclays (BCS) and other global banks had rigged the Libor, or London Interbank Offered Rate, interest rate benchmark.

So many investors have thrown up their hands in disgust and now won't invest in the financial markets at all because they think they're corrupt and rigged. Or, they invest cynically, figuratively holding their noses. Who can blame them? Not I, certainly.

Think about the logic that explains the 6% gain in shares of JPMorgan Chase.

First, there's the argument that the $5.8 billion loss from the disastrously complex London Whale trade (put on by an employee in London operating out of the bank's chief investment office) shouldn't count because it's a one-time problem.

This is the position taken by JPMorgan Chase CEO Jamie Dimon, who said, in announcing the bank's second-quarter earnings that the results showed "really good underlying performance."

Image: Jim Jubak

Jim Jubak

Kind of hard to see, actually. Even if you look past that huge loss.

A closer look at JPM's earnings

Reported earnings for the second quarter came in at $1.21 a share, a drop from the $1.27 a share reported for the second quarter of 2011. Revenue fell by 16.5% from the second quarter of 2011. Further breaking down the income statement, revenue from fixed income and equity markets dropped to $4.54 billion in the quarter from $5.36 billion in the second quarter of 2011.

The bank did much better in bread-and-butter banking than it did on the investment banking and trading side. Revenue from retail banking, which includes home loans and checking, rose to $7.9 billion in the quarter from $7.1 billion in the second quarter of 2011. Income for this unit climbed to $2.3 billion from $383 million. Mortgage fees and related revenue rose to $1.6 billion from $595 million. Net income climbed to $931 million from $286 million in the second quarter of 2011.

But even in JPMorgan Chase's banking business, there were signs of trouble on the horizon. Net interest margin -- the difference between what the bank makes on its loans and what it pays to raise cash in the financial markets -- dropped to 2.47% in the second quarter from 2.72% in the same period last year.

All this good news matters only if you agree with Wall Street accounting. There was the assumption that the brutal $4.4 billion pretax loss on the London Whale trading position was a one-time event. And the bookkeeping that offset much of that loss with a $1 billion pretax gain in the securities in the chief investment office portfolio, a $2.1 billion pretax benefit from a reduction in loan-loss reserves, an $800 million gain from debit valuation adjustments and a few other items.

If you exclude all these accounting adjustments, JPMorgan Chase earned 67 cents a share. That is well below the 76 cents a share projected by Wall Street analysts.

Wall Street has played fast and loose with bank earnings since the financial crisis, dismissing some losses as one-time events and counting some gains that I'd call one-time as part of a bank's regular revenue stream. That's exactly what Wall Street analysts and the stock market seem to have done again this quarter with JPMorgan Chase.

To me, that seems profoundly wrong. If the financial crisis has taught us anything, it's that the big global investment banks have made risky trading with their own money -- the sort of activity that resulted in $5.8 billion and counting in losses from the London Whale position -- a core part of their business model. Goldman Sachs (GS) does it. Citigroup (C) does it. Bank of America does it.

The gains and losses from those activities may be lumpy and may swing from plus to minus with any quarter, but they can't be discounted as one-time events. The big global investment banks are engaged in activities like this every day. To say that JPMorgan Chase's core banking business is doing fine -- and ask investors to somehow consider trading losses as outside the core -- profoundly misrepresents the risk of the current investment banking model.

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