Accounting Quirk Juices J.P. Morgans Net - WSJ

Accounting Quirk Juices J.P. Morgans Net - WSJ - Accounting...

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See a sample reprint in PDF format. Order a reprint of this article now BUSINESS OCTOBER 13, 2011, 8:59 P.M. ET By MICHAEL RAPOPORT And AARON LUCCHETTI So what exactly is a "debit valuation adjustment," and why did it boost J.P. Morgan Chase earnings so much? And why do some observers, including J.P. Morgan Chief Executive James Dimon, say these adjustments make it harder to judge a bank's true health? J.P. Morgan said Thursday the adjustment raised its third-quarter earnings by $1.9 billion before taxes. The gain stems, counterintuitively, from an accounting rule under which banks record profits when the market value of their debt declines. In other words, worsening perceptions of J.P. Morgan's credit- worthiness are actually helping the New York company's bottom line. "I think this is the kind of thing that gives accountants a bad name, frankly," said Robert Willens, an accounting and tax expert who heads his own firm, Robert Willens LLC. Other financial firms that have seen their debt decline in value as the market sags are expected to report similar third-quarter earnings boosts. Morgan Stanley , for instance, might record a pretax gain of $1.5 billion to $2 billion, people who follow the company speculated. The company is set to report results Wednesday.
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Accounting Quirk Juices J.P. Morgans Net - WSJ - Accounting...

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