Don't buy into JPMorgan sucker's rally

Wall Street has no clue about the extent of the banking giant's trading losses.

By Jonathan Berr Jul 13, 2012 12:33PM

Image: Wall Street sign (Â© Corbis/SuperStock)

Shares of JPMorgan Chase (JPM) surged Friday after the largest U.S. bank by assets reported better-than-expected earnings, even as its trading losses mounted.

People may regret buying into the rally, because no one seems to have a clue about what's really happening at the venerable Wall Street company.

JPMorgan estimated the trading losses caused by the "London Whale" at $5.8 billion through Thursday, $4.4 billion of which occurred in the second quarter. That's way up from an earlier estimate of $2 billion. And that number could grow further, as JPMorgan has "recently discovered information" that indicates the traders may have tried to cover up the extent of their trading losses. Remember, CEO Jamie Dimon, long considered one of the smartest people on Wall Street, first dismissed the problem as a "tempest in a teapot."

Cliches aside, given the mushrooming of JPMorgan's problems, it wouldn't surprise me if the latest earnings have to be restated, as well. JPMorgan already restated its first-quarter results, slashing net income by $459 million. The second-quarter results released Friday show that net income fell to $4.96 billion, or $1.21 per share, on revenue of $22.18 billion -- not bad, given the fragile state of the economic recovery.

The average 52-week price target for JPM is $45.22, about 25% higher than where it currently trades. Given the company's problems and the state of the economy, that forecast seems more like a pipe dream.

Dimon, who has been JPMorgan's CEO since 2005, has seen his credibility with shareholders erode since the trading losses were disclosed. On Friday, he noted that former chief investment officer Ina Drew, who was responsible for supervising the "London Whale," offered to return two years of her pay. Investors may press Dimon -- whose 2011 pay package of $23 million is the most of any bank CEO -- to do the same. Dimon will be lucky if that's the extent of his problems.

Though there doesn't appear to be a groundswell calling for Dimon to quit, there are some rumblings of discontent starting to emerge. Lee Saunders, the head of the American Federation of State County and Municipal Employees, a longtime Dimon critic, noted that the trading losses underscore the "casino mentality" that permeates Wall Street. For now, the blunt-spoken son of Greek immigrants has earned kudos for tackling the problem head on. He has said repeatedly that he was unaware of the magnitude of the risks traders were taking in JPMorgan's name. That argument can go only so far, especially if the trading losses continue. Wall Street eventually will begin to ask why Dimon didn't have a better idea what was happening on the trading desk. His job is far less secure than it was before the scandal broke.

The rally in JPMorgan's shares could turn at the slightest hint of more bad news. The stock may move like a rickety roller coaster for some time, which is why it should be avoided.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr.

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