Bankers are supposed to be savvy at finance, but they make the same mistake generation after generation: They jump on bandwagons only to get bruised when the road gets bumpy.
The latest example was the mad rush into private equity investing and investment banking.
As we go to press, banks are preparing for their second-quarter earnings reports and it is clear that the private equity/investment banking chickens are coming home to roost.
J.P. Morgan Chase
It’s hard to understand why analysts are so enamoured with J.P. Morgan Chase. Despite disappointment after disappointment, they continue to hail Chase as a brilliantly positioned bank ready for a takeoff. Of course, the takeoff never comes, and things seem to get worse and worse.
Chase had one great year, 1999, when it reaped tremendous gains from its private equity investments. That, according to CEO Harrison, made Chase a "believer" in the now-tarnished New Economy. That heady experience encouraged Chase to plunge deeper into private equity investment and into investment banking, capped by its acquisition last year of J. P. Morgan & Co.
The inevitable downturn has hurt JPM/Chase badly. Its return on equity over the past 12 months was about 12%, or some 30% below the industry average.
Conditions are looking even worse for the rest of this year, and perhaps into 2002. In a filing with the Securities & Exchange Commission, JPM/Chase said it lost more money in its portfolio of non-publicly traded stocks than it gained in those that are publicly traded. It also said selling its holdings has become more difficult because of market difficulties in bringing out new IPOs, and the weakness in the mergers-and-acquisition business.
Chase also warned that its investment banking fees are likely to be lower than had been expected, and that the outlook for trading revenues also is poor.
The New England giant also is having private equity problems, which is why Keefe Bruyette & Woods reduced its earning predictions for Fleet to $3.25 per share for 2001, from $3.35, and to $3.65 for 2002, from $3.75.
"The primary cause for near-term weakness is in principal investing where we now expect no revenue in the second quarter," writes Thomas F. Theurkauf Jr., a KBW analyst. "In fact," he continues, "given sloppy equity markets and slow IPO and M&A activity, an absolute loss in the quarter cannot be ruled out."
Wells Fargo said it would take a special charge of about $1.05 billion as a result of its private equity portfolio. Most of the charge is a reversal of unrealized capital gains taken in 1999 and 2000. Last year, Wells booked $1.9 billion in gains from its venture capital portfolio. It is "embarrassing for a tech-savvy company like Wells to have essentially held on to selected technology positions throughout the decline in Nasdaq," writes Andrew A. Marquardt, an analyst with UBS Warburg. But Marquardt says because Wells has written "these positions down to such a low level, [it] is in a better position to post gains going forward."
Reports KBW: "In the past, ONE has suggested it would be reasonable to expect Corporate Investments [which includes private equity investments] to earn $50 million per quarter under ‘normal’ conditions. The segment lost $29 million in the first quarter. On June 4, apparently expecting less from the equity side of the business, [CEO Jamie] Dimon suggested a quarterly earnings target of $25 million from this segment for the balance of the year."