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Just jumpped into the trading world

Trading Risks Distinguish the Haves and Have-Nots in Banking – WSJ.com 2009/04/18

A Favorable Trade-Off for J.P. Morgan

Article

By LIAM DENNING

In a curious twist, banks’ sometimes vilified trading operations have been the stars of the earnings season so far.

J.P. Morgan Chase echoed Goldman Sachs Group with results on Thursday that were heavy on investment-banking profits, but weaker elsewhere.

Associated Press

J.P. Morgan Chase Chief Executive Jamie Dimon, left, and Goldman Sachs Chief Executive Lloyd Blankfein, leave the White House in Washington, March 27. Both banks’ results may reflect the emergence of industry haves and have-nots.

In terms of beating the consensus forecast, J.P. Morgan’s 25% margin doesn’t compare with Goldman’s home run. But in other ways, its results look better. J.P. Morgan’s big win came in fixed-income markets. Unlike Goldman, this didn’t come with a big jump in the bank’s overall value-at-risk measure, although in absolute dollars it remains higher. Nor did the skew toward trading revenue look as pronounced, with J.P. Morgan’s equity underwriting and advisory businesses showing more resilience.

Both banks’ results may reflect the emergence of industry haves and have-nots. Most banks rely on Washington’s helping hand right now. Cheap government-guaranteed financing most likely helped institutions take trading risks they might otherwise have curtailed.

But the likes of J.P. Morgan are setting themselves apart. Even without TARP, J.P. Morgan says its Tier 1 capital ratio is above its target range of 8% to 8.5%.

J.P. Morgan’s Achilles’ heel is exposure to consumers, where guidance on losses accelerated in credit cards, home-equity loans and prime mortgages. At least, however, the bank can funnel investment-banking profits into loan-loss reserves.

With unemployment still rising and home prices still falling, those banks less able to take risk likely will struggle. That is bad for them, but no picnic for regulators trying for broad resuscitation, either.

Write to Liam Denning at liam.denning@wsj.com

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