JPMorgan – Too Big To Fail

[Updated: 20 July 2020]

Big banks like JPMorgan Chase , Bank Of America, Citigroup, Wells Fargo, and Goldman Sachs are preparing for losses in 2020 from loans they made. Here is how much in cash the largest U.S. banks have set aside over the first half of 2020 to cover their loan losses:

• JPMorgan Chase: $18.8 billion
• Citigroup: $14.9 billion
• Wells Fargo: $13.4 billion
• Bank of America: $9.9 billion
• Goldman Sachs: $2.5 billion

That is a total of almost $60 billion these 5 banks expect to lose on their loans in 2020.

With almost $19 billion set aside for losses, why didn’t JPM stock drop?

Answer: It’s simple

This is how banks work

Let’s step back a bit. If you’re a big bank, you get to borrow interest-free. Not sure? Just check your bank account, they aren’t paying you much, if anything, on your checking or savings account balances. The banks then lend to businesses and consumers at a much higher rate.

But here’s the thing: loans gone bad? Investors need not worry.

The U.S federal reserve is backing up the banks. This was all too clear in 2008 when the Fed bailed out the banks with billions of dollars in no-strings-attached cash, and things won’t be too different this time either. In fact, here is JPM stock comparison during the 2020 COVID crisis to 2008.

Here is JPMorgan for you at the end of Q2 2020:

1. JPMorgan’s lending*

• Mortgage loans of $189 billion
• Credit Card loans of $142 billion
• Auto loans of $59 billion
• Personal, Student and Small Business loans of $47 billion
• Commercial Real Estate loans of $103 billion
• Commercial and other loans of $425 billion
• Total Loans of $979 billion

2. JPMorgan’s borrowing*

• Consumer deposits (savings accounts, checking accounts, time deposits, etc.) of $1.93 trillion
• Short-term borrowings of $48 billion
• Long-term debt of $317 billion
• Total Borrowings of $2.29 trillion

Now, the net interest income for JPMorgan (which is the cash remaining in its coffers after removing any interest it has to pay from the total interest it earns across its huge portfolio of loans) was $28.3 billion for the first half of the year. So the $18.8 billion it set aside to cover loan losses for this period wiped out a good two-thirds (67%) of its net interest income.

Here is the full picture of JPMorgan’s revenues: what’s big and what’s changed over the years.

So in summary, despite large amounts marked out for 2020 losses, two things will be true when Covid-19 subsides – whether it’s early 2021 or later:

1. The U.S. federal reserve is backing JPM, and it will pump in…