lPMorgan's WaMu Windfall Turns Bad Loans Into Income (Update2)
Share I Email I Print I A A A
By Ari Levy and Elizabeth Hester
May 26 (Bloomberg) -- JPMorgan Chase & Co. stands to reap a
$29 billion windfall thanks to an accounting rule that lets the
second-biggest U.S. bank transform bad loans it purchased from
Washington Mutual Inc. into income.
Wells Fargo & Co., Bank of America Corp. and PNC
Financial Services Group Inc. are also poised to benefit from
taking over home lenders Wachovia Corp., Countrywide Financial
Corp. and National City Corp., regulatory filings show. The deals
provide a combined $56 billion in so-called accretable yield, the
difference between the value of the loans on the banks' balance
sheets and the cash flow they're expected to produce.
Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders
are seizing on a four- year-old rule aimed at standardizing how they book acquired loans that have
deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost
value during the worst financial crisis since the Great Depression, the banks will wring revenue from the
wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and
accounting consulting firm in New York.
"It will benefit these guys dramatically," Willens said. "There's a great chance they'll be able to record
very SUbstantial gains going forward."
JPMorgan rose $2.13, or 6.2 percent, to $36.54 at 4 p.m. in New York Stock Exchange composite
trading. Wells Fargo gained 1.3 percent to $25.65 and PNC Financial climbed 5 percent to $43.25. Bank
of America fell 9 cents to $10.98.
Purchase Accounting
When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based
bank used purchase accounting, which allows it to record impaired loans at fair value, marking down
$118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain
$29.1 billion over the life of the loans in income before taxes and expenses.
The purchase-accounting rule, known as Statement of Position 03-3, provides banks with an incentive to
mark down loans they acquire as aggressively as possible, said Gerard Cassidy, an analyst at RBC
Capital Markets in Portland, Maine.
"One of the beauties of purchase accounting is after you mark down your assets, you accrete them back
in," Cassidy said. "Those transactions should be favorable over the long run."
JPMorgan bought WaMu's deposits and loans after regulators seized the Seattle-based thrift in the
biggest bank failure in U.S. history. JPMorgan took a $29.4 billion writedown on WaMu's holdings,
www.bloomberg.com/apps/news?pid=2067000 1 &sid=a10066r8Ht9k 6/16/2010
Bloomberg Printer-Friendly Page
mostly for option adjustable-rate mortgages and home- equity loans.
'Price Judgment'
Page 2 of4
"We marked the portfolio based on a number of factors, including housing-price judgment at the time,"
said JPMorgan spokesman Thomas Kelly. "The accretion is driven by prevailing interest rates."
JPMorgan said first-quarter gains from the WaMu loans resulted in $1.26 billion in interest income and
left the bank with an accretable-yield balance that could result in additional income of $29.1 billion.
The difference in accretable yield from bank to bank is due to the amount of impaired loans, the credit
quality of the acquired assets and the state of the economy when the deals were completed. Rising and
falling interest rates also affect accretable yield for portfolios with adjustable-rate loans.
It's difficult to gauge how much the yield will add to total revenue because banks don't disclose the
expenses that chisel away at the figure. The income is also booked over the life of the loans, rather than
in a lump sum, and banks don't spell out how long that is, Willens said.
Zurück
Weiter
