How JP Morgan Just Made $1.9 Billion By Everyone Betting Against Them

Earlier this morning, JP Morgan reported Q3 earnings of $1.02 per share, which compares to analysts’ expectation for $0.92 per share.

However, no one can seem to agree on whether or not JP Morgan actually beat the analysts’ estimates.

In fact, CEO Jamie Dimon was the first to say that there were “several significant items” that were unusual during the quarter.

The one item everyone is raising red flags about is the $1.9 billion pretax DVA gain.  DVA is short for debt valuation adjustment.

Bloomberg explains the DVA:

[R]esults may include gains taken under a U.S. accounting rule known as Statement 159, adopted by the Financial Accounting Standards Board in 2007, which allows banks to book profits when the value of their bonds falls from par. The rule expanded the daily marking of banks’ trading assets to their liabilities, under the theory that a profit would be realised if the debt were bought back at a discount.

In other words, when investors and traders bet against a banks’ bonds, causing credit default swap spreads to soar, the bank is allowed to book a mark-to-market gain.

Last year, Bloomberg spoke to Oppenheimer analyst Chris Kotowski who called the DVA an “abomination.”  He explains, “Just because Morgan’s credit spreads widened out this quarter doesn’t mean that their ultimate interest and principal payments changed one iota.”

But Dimon doesn’t act like the DVA is anything worth applauding.  “The DVA gain reflects an adjustment for the widening of the Firm’s credit spreads which could reverse in future periods and does not relate to the underlying operations of the company.”

Expect more banks to report DVA gains.

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