Opinion by Patricia L Johnson
The big news today is the $2 billion loss JPMorgan Chase & Co. racked up in the past six week period of time on credit derivatives. CEO Jamie Dimon stated the derivative bet was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”. That little tidbit was announced last night and by the time the market opened this morning the DJIA was already on its way down, down, down.
$2 billion dollars is a lot of money, but it’s not the entire problem with JPMorgan Chase. In addition to the $2 billion dollar loss, they are also looking at $4.2 billion in excess of reserves for legal proceedings.
Most corporations operate under an accrual accounting system rather than a cash basis accounting system as the accrual method is considered to be more accurate. Example, under a cash system a company would indicate what was actually paid out in legal fees, while under an accrual system they would accrue for the various legal expenses they expect to incur during that period. We’ll use $500,000.00 as an example. Let’s assume JPMorgan Chase accrued $500 million a month for legal fees and at the end of the quarter their accrual was $1.5 billion, yet legal fees to date were $5.7 billion. The difference is the $4.2 billion ‘excess of reserves’.
$4.2 billion may be a drop in the bucket by the time the regulatory probe for alleged fraud is completed by the Office of Comptroller of the Currency. The allegations against Chase were made by former employees of the company. Chase was allegedly selling delinquent credit card accounts to collection agencies after they had already taken their customers to court and judgments were issued against the borrowers. We’re talking about tens of thousands of delinquent customers.
Companies that have outstanding past due receivables have a few choices, they can turn the account over to a collection agency for a set fee, the collection agency gets a percentage and the company gets a percentage, or they can sell the account to the collection agency for pennies on the dollar, in which case the collection agency keeps all monies collected, or they can take the customer to court and obtain a money judgment against the customer. What they cannot do is take the customer to court, obtain a judgment and then sell the account to a collection agency.
Whether or not Chase is guilty of fraud is yet to be determined, but one thing is for certain this is going to put another black mark against an industry that appears to put its bottom line ahead of anything and everything else.
JPMorgan Chase & Co. was ranked # 16 on the Fortune 500 listing for 2011 indicating the following numbers for revenues and profits (in millions of dollars).
Dimon’s comments on the financial condition of Chase follows: “I’ll be damned if we don’t have record profits at least for a while now.”
It will be interesting to find out how much of Chase’s profits are based on legitimate earnings v. fraudulent creative accounting practices.
© 2012 Patricia L Johnson