J.P. Morganís bet against J.P. Morgan
Commentary: Sounds crazy, but it worked

MarketWatch | October 13, 2011
By David Weidner

NEW YORK (MarketWatch) ó The post-financial crisis Wall Street is doing one thing right: itís betting against itself.

J.P. Morgan Chase & Co. became the latest too-big-to-fail bank to take advantage of an interesting trade: the bank hedges the spread on its own debt. When investors bid up the yield ó an indicator that they think the bank wonít pay ó J.P. Morgan makes money. Read full story on J.P. Morgan earnings.

Hey, it doesnít have to make sense, itís Wall Street. 

The end result was slightly better-than-expected but lackluster profit of $4.26 billion, for the nationís second-biggest bank by assets. The bank reported $1.9 billion in revenue from the bets against itself ó the net income from the move wasnít immediately available. 

But analysts suggest the move goosed earnings by as much as a nickel per share. At minimum the hedge added a penny or two a share to per-share earnings and, thus, helped the bank come closer to the Streetís expectations. 

Of course, J.P. Morgan isnít alone in this. Morgan Stanley offset losses during the financial crisis and beyond by betting against its own debt.

Todayís bank earnings must make even the most devoted investor long for the good old days of quarterly results.

Bank earnings of yesteryear were simple, everyone made a profit and wowed the analysts. Of course, they were juiced by phony mortgages, end-of-the-quarter repurchase agreements, and 25-to-1 leverage, but ignorance was bliss. We understood them. They made us happy.

Now, theyíre just betting against themselves. When you stop and think about it, it doesnít sound so crazy after all.