The Wall Street Journal-20080117-breakingviews-com - Financial Insight- Dimon-s Relative Success- J-P- Morgan Sidesteps Massive Subprime Woes But Still Trades at Discount
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breakingviews.com / Financial Insight: Dimon's Relative Success; J.P. Morgan Sidesteps Massive Subprime Woes But Still Trades at Discount
Jamie Dimon is on a roll. His J.P. Morgan Chase empire has largely sidestepped the subprime-mortgage sinkhole that has swallowed up a number of other financial houses. And the bank just leapfrogged his former employer, Citigroup, to become America's second-largest bank by stock-market value. But despite its relative success, J.P. Morgan has been trading at a discount to many of its peers -- including Mr. Dimon's beleaguered alma mater -- at least as measured relative to its book value.
The bank has been trading at just above its book value for several weeks now. Usually trading close to or below book is an indication of distress, or at least that shareholders are worried. And yes, a recession could hurt the bank. But you would think J.P. Morgan would be better able to weather it than write-down laden Citigroup.
Yet even after its $23 billion credit hit this week, Citigroup still is valued at just about the same percentage of its assets as is Mr. Dimon's outfit. Of course, J.P. Morgan is hardly risk-free. Its retail bank has large mortgage and credit-card businesses, and delinquencies are rising. But the bank doesn't have Citigroup's subprime car-loan portfolio, and it sports one of the highest Tier One capital ratios -- a measure of a bank's health -- among U.S. banks, at 8.4%.
J.P. Morgan also has set aside roughly $10 billion in loan-loss reserves. That is more than Citigroup has, and for a balance sheet that is just two-thirds the size of Citigroup's. What is more, unlike its rival, J.P. Morgan isn't saddled with dicey mortgages, whereas Citigroup has $51 billion of these. And J.P. Morgan's exposure to subprime and collateralized debt obligations is just $2.7 billion, much of it hedged, compared with the whopping $37 billion that Mr. Dimon's Citigroup counterpart, Vikram Pandit, still has to deal with.
So why does J.P. Morgan's price-to-book value not reflect its healthier-looking situation? Perhaps investors still aren't entirely convinced that risk management at the investment bank is rock solid. After all, its volatile trading results caused consternation for about five years before Mr. Dimon steadied the ship. True, he might not expect the bank to trade at the dizzying 2.6 times book commanded by the apparently impervious US Bancorp. Still, it certainly seems unwarranted for J.P. Morgan to be lumped in with Citigroup.
Macklowe's Buyer's Remorse
Blackstone Group's real-estate group broke new ground when it bought Equity Office Properties for $39 billion last year. It sold more than half the property portfolio for a tidy profit. But there is at least one case of buyer's remorse.
Real-estate magnate Harry Macklowe's property firm bought $7 billion of the assets from Blackstone. Now, Mr. Macklowe is trying to sell the General Motors building in New York, which he used as collateral for loans he took out to finance his deal with Blackstone.
Mr. Macklowe's problem is that his short-term loans come due next month, and lenders aren't willing to refinance them. That is partly because the lenders are finding it harder to sell loans in the commercial mortgage-backed securities market, where liquidity has dried up.
Mr. Macklowe isn't alone in being turned away. Real-estate company Kushner Co. recently paid off a $200 million loan rather than face the tough refinancing market. Luckily for Kushner, it could drum up the cash. Mr. Macklowe appears less flush. His hurried sale of the GM building will test investors' appetite for New York real estate.
Other stretched borrowers could be lurking, and they too could have difficulty. After all, Merrill Lynch is predicting that CMBS demand will be down 60% this year over last. Three large real-estate intensive buyouts -- Harrah's Entertainment, Hilton Hotels and Manor Care -- already are fighting for what little appetite remains.
It is one of several cracks appearing in the otherwise healthy commercial real-estate market. If they spread, opportunities could arise for cash-flush buyers. In spite of problems a downturn could cause for, say, its Hilton deal, Blackstone might be among them.
-- Antony Currie and Lauren Silva
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This column is by breakingviews.com, an online financial commentary site.
