JP Morgan Feels Loan Losses: Profit Tumbles 84 Percent

J.P. Morgan Chase & Co. (JPM) reported Wednesday an 84 percent plummet in third-quarter profit, largely due to $3.6 billion in mark-downs and $640 million in losses from its acquisition of Seattle-based thrift Washington Mutual. “Given the uncertainty in the capital markets, housing sector and economy overall, it is reasonable to expect reduced earnings for our firm over the next few quarters,” chief executive Jamie Dimon said in a press statement Wednesday morning. He may as well have been speaking for much of the financial sector. Third-quarter net income came in at $527 million, or 11 cents per share, compared to a significantly higher $3.4 billion — 97 cents a share — during the same quarter last year. The bank recorded additional losses of $642 million from its investments in preferred shares of now-conserved Fannie Mae (FNM) and Freddie Mac (FRE). In the government’s recent takeover of both Fannie and Freddie, the value of the two firms’ preferred shares was wiped out. The company’s mortgage banking operations reported a net loss of $50 million, slightly higher than the $48 million loss recorded in the prior year. Origination volume fell 4 percent from 2007’s levels, and dropped a significant 33 percent from last quarter alone. The drop in income masked a healthy jump in net revenue, however, which was up 64 percent. As of this week, the bank is set to get a $25 billion cash injection from the Treasury’s new plan to invest in the nation’s financial institutions in effort to replenish liquidity and inter-bank lending. After purchasing troubled investment bank Bear Stearns Cos Inc. in March, JP Morgan sold $10 billion of stock to fund its purchase of WaMu — the largest bank to fail in U.S. history.  WaMu left JPMorgan with loads of bad mortgages that drove $30 billion in write-downs alone. Despite the challenges and risks facing the housing market, Dimon said “we have incorporated expectations of significant credit losses from Washington Mutual’s home-lending portfolio into the structure of the transaction.” Dimon — known for his straight shooting style — also said that he expects mortgages to get much worse in the months ahead. “We have to be prepared that it gets a lot worse and we are,” Dimon said today on a conference call with analysts, according to a Bloomberg News report. “We are bracing for increasing loan loss reserves.” Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade. Editor’s note: To contact the reporter on this story, email [email protected].