September 26, 2008 / 10:51 PM / 9 years ago

JPMorgan sells $10 billion shares, faces Q3 loss

<p>The wind blows the JPMorgan Chase flag outside its building in front of the Bear Stearns building across the street (C) in New York, March 17, 2008.Chip East</p>

NEW YORK/SEATTLE (Reuters) - JPMorgan Chase & Co (JPM.N) capped off its purchase of Washington Mutual Inc (WM.N) on Friday by selling $10 billion of stock, more than it expected, while analysts warned the company faces a third-quarter loss.

The $1.9 billion acquisition of WaMu makes JPMorgan the second-largest U.S. bank by deposits and marks the largest bank failure in U.S. history. It also saddles JPMorgan with the troublesome mortgages that caused painful write-downs and credit losses for the thrift.

"It's too early to know if JPMorgan is a big winner or loser from this deal," said James Ellman, portfolio manager at hedge fund Seacliff Capital.

Investors gave the deal an early vote of confidence, though, sending JPMorgan shares up more than 10 percent.

"They basically bought the company for nothing," said John Stein, co-founder of investment firm FSI Group. Stein added that, if JPMorgan's assumptions about WaMu's holdings are right, "It's a great deal."

Jamie Dimon, JPMorgan's hard-charging chief executive, sees the deal as a boost to the empire he has been building since he arrived from Banc One four years ago.

"We're building this franchise for the long term -- not for next year or the next five years, but for the next 100 years," he said on a call with investors.

Dimon had considered buying WaMu at various points this year. By holding out for a deal in which JPMorgan snared WaMu's banking assets, while leaving behind about $20 billion in debt, his reputation as a savvy deal maker looks set.

Dimon sometimes prefers to present his actions as a form of corporate philanthropy. He said on another call that "We're trying to be a great corporate citizen."

This is the second time Dimon has played the savior statesman in a little over six months -- with the WaMu deal following JPMorgan's acquisition of Bear Stearns Cos in March.

Analysts warned that worsening markets may mean WaMu's purchase could weigh on JPMorgan's profitability.

Susan Roth Katzke, an analyst at Credit Suisse, said in a research note that she was "less confident in the cost of the current credit and capital markets cycle to the bank's existing operations."

Citigroup analyst Keith Horowitz wrote in a note to clients that the near- to intermediate-term outlook remained challenged in light of higher costs in credit cards and at the retail bank, as well as the increasing likelihood of sustained lower revenues from capital markets business.

Write-Downs

The immediate outlook is certainly not all rosy. JPMorgan is taking on $296 billion of tangible assets from Washington Mutual, at least some portion of which are the mortgages that caused the thrift to unravel.

The bank will write down more than $30 billion from the WaMu acquisition and incur $1.5 billion of pre-tax costs.

At the same time, JPMorgan has raised its expectations for write-downs on its own leveraged lending and mortgage-related positions to between $3 billion and $3.5 billion, up from $1.1 billion in the second quarter.

While analysts sought to assess how the deal affects JPMorgan's financials, WaMu staff and customers were trying to assess what the deal means for them.

Madelain Verter, a customer at a WaMu branch in New York, arrived to make a deposit and heard other depositors discussing whether to withdraw their funds.

"I guess with the state of the economy, it shouldn't have come as a surprise," she said.

Customers were mostly unfazed by the takeover -- the only concern was voiced by New York customers with existing accounts at Chase, nervous the merger might leave their combined deposits above the $100,000 ceiling insured by the Federal Deposit Insurance Corp.

But at WaMu's headquarters in Seattle employees were struggling to come to grips with the news.

"We are now Chase employees," said Bryan Johnson, 50, a senior consultant. "We don't think we'll have our jobs in a couple of months. We went out and got drunk last night, and probably will do so again tonight."

JPMorgan estimated about 10 percent of the combined banks' branches will be consolidated in regions where they overlap.

WaMu Chief Executive Alan Fishman joined the bank less than three weeks ago and received a $7.5 million signing bonus. His future with the company remained uncertain.

Reporting by Elinor Comlay

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