JP Morgan: A Better Acquirer than Bank of America

Once Citigroup has been broken up, America will have two big financial supermarkets: Bank of America and JP Morgan Chase. There are many differences between them, but a very big one is their track record when it comes to recent acquistions. Look at this morning’s news: Bank of America said it couldn’t even close its Merrill Lynch acquisition without substantial extra government help, and is likely to get billions of dollars in federal guarantees. JP Morgan, by contrast, is relying on its recent acquisition of Washington Mutual to keep it in the black:

J.P. Morgan reported net income of $702 million, or seven cents a share, down from $2.97 billion, or 86 cents a share, a year earlier. The latest results included $1.1 billion in gains related to the purchase, along with $853 million in hedging gains on its mortgage-servicing rights.

Excluding the WaMu gain, J.P. Morgan said it would have lost 28 cents a share.

Interestingly, the bulk of those losses — $2.9 billion — came from writing down the investment bank’s leveraged loans. During the boom years, it was an article of faith that investment banks needed huge balance sheets, because no one would use their M&A advisory services if they couldn’t get cheap loans at the same time.

But looking at the scale of these losses, it seems clear that no amount of M&A advisory fees could make up for them: JP Morgan would have been better off financially just simply axing its M&A department altogether.

That’s not going to happen: JP Morgan has a genuinely strong M&A franchise. But don’t expect Chase lenders like Jimmy Lee to allow themselves to be bullied into uneconomic deals in future, just because the M&A bankers are salivating at the prospect of big fees.