The Role of JP Morgan Chase & Co in the Financial System - Essay Example

J.P. Morgan Chase & Co. Explain the role of J.P. Morgan Chase & Co. in the financial system. Assess its exposure and performance during the financial crisis of 2007-2011. Did it do well or badly? J.P. Morgan Chase & Co. – A Brief Overview J.P. Morgan Chase & Co. is amongst the largest financial holding company in the United States. The company was established in 1823 with its head offices located in the city of New York (Yahoo Finance, 2013). Apart from the fact that it is based in the United States, the services of the company are spread all over the world. There are various segments in which the company operates, which include, asset management, investment banking, private banking, commercial banking, investor services and treasury services (Yahoo Finance, 2013; J P Morgan Chase & Co., 2013). Role of J.P. Morgan Chase & Co. in the Financial System The role of J.P. Morgan Chase & Co. in the financial system is defined by the nature of its operations, segments in which it operates and the reach of the company in the domestic and international financial market. J.P. Morgan Chase & Co. is the forerunner in asset management sector and its advisory services are obtained by businesses and investors throughout the world. In the capacity of largest asset management company in the world, by the end of the month September 2013, J.P. Morgan Chase & Co. had a total of USD 1.5 trillion assets (J P Morgan Chase & Co., 2013). Another role played by J.P. Morgan Chase & Co. is its corporate and investment banking services. The operations of J.P. Morgan Chase & Co. banking services are available in more than one hundred countries around the globe. The main aim of the corporate and investment banking services offered by the company is to provide information and advisory services, generating capital, risk management and ensuring liquidity for its clients all over the globe (J P Morgan Chase & Co., 2013). A very important part of its services include the treasury services, which include cash management for large business entities, liquidity management and other related services. The treasury services of the company are availed by more than 135,000 organizations all over the world (J P Morgan Chase & Co., 2013). During the financial crisis period, J.P. Morgan Chase & Co. provided continuous support to its clients all over the world. In fact, during the beginning of financial crisis, i.e. in year 2008, the company provided USD 300 billion to its clients in the form of loans. In addition to this, credit of more than USD 11 billion were provided to other institutions and organizations, which included hospitals and education sector (J P Morgan Chase & Co., 2008). Highlighting the importance of J.P. Morgan Chase & Co. as an important financial institution, Sears (2012) state in his column that, “Many investors consider the bank an important indicator, especially any future guidance management offers, since the financial sector is so critical to the overall trajectory of the Standard & Poors 500 index.” (Sears, 2012). Impact of Financial Crisis on J.P. Morgan Chase & Co.’s Financial Standing During the period of credit crunch, like other companies J.P. Morgan Chase & Co. also faced a difficult time, when its net revenues declined significantly in 2008 as compared to previous years (J P Morgan Chase & Co., 2008; Clark, 2008). As for instance, the total net revenues of the company were USD 67,252 million in 2008, as compared to total net revenues reported in 2007, which amounted to USD 71,372 million. Selected Financial Statement Items 2008 2007 2006 Amount in millions except for earnings per share Total Net Revenue 67,252 71,372 61,999 Provision for credit losses 19,445 6,864 3,270 Net income 5,605 15,365 14,444 Earnings per share 1.41 4.51 4.16 Source: (J P Morgan Chase & Co., 2008) Similarly, the company also increased its provisions to significant levels owing to the expectations of increased defaults from its clients in the wake of credit crunch period. The provisions for credit losses in 2008 reached USD 19,445 million in contrast to the provisions made in 2007, which amounted to USD 6,864 million (J P Morgan Chase & Co., 2008; J P Morgan Chase & Co., 2007). Comparing the year 2008, during which financial crisis was at its peak, with 2007, the revenues of the company deteriorated significantly. The revenues of J.P. Morgan Chase & Co. comprises of revenues from trading and investing activities, which decreased in 2008 by an amount of USD 19.7 billion as compared to 2007 (J P Morgan Chase & Co., 2008; J P Morgan Chase & Co., 2007). This decline was largely attributable to high markdowns on exposures related to mortgage and leveraged lending commitments. In addition to this, revenues related to asset management and other administrative services of the company went down owing to downfall in fee and asset management market (J P Morgan Chase & Co., 2008). As far as stock performance is concerned, JP Morgan’s stock prices dwindled in 2008 as compared to previous years, which are presented as under: Stock Performance 2003 2004 2005 2006 2007 2008 JP Morgan Chase $100.00 $109.92 $116.02 $145.36 $134.91 $100.54 S&P Financial Index $100.00 $110.89 $118.07 $140.73 $114.51 $ 51.17 S&P 500 $100.00 $110.88 $116.33 $134.70 $142.10 $ 89.53 Source: (J P Morgan Chase & Co., 2008) Apart from all these losses in revenues, the company followed an optimistic approach and acquired the banking operations of Washington Mutual in 2009, whereby a gain of USD 1.9 billion was recorded (J P Morgan Chase & Co., 2008). Apart from this, there were various actions taken by the management of the company which signified the unfavourable impact of the financial crisis on the overall financial standing of the company. For example, in February 2009, J P Morgan’s Board decided to bring down the per share dividend, to be paid to its stockholders at the end of the quarter, from USD 0.38 to USD 0.05. By taking that action, J.P. Morgan Chase & Co. was able to secure USD 5 billion in the form of common equity each year, which helped the company in ensuring a strong balance sheet of the company. This allowed the company to portray a healthy financial position in a financially distressed period (J P Morgan Chase & Co., 2008). Keeping in view this analysis of J.P. Morgan’s financial performance and stock market performance, it can be stated that the company did well in comparison with its peers. Although, the stock prices of the company and revenues and net income went down when the financial crisis began, but it is still considered as satisfactory as the company was able to respond to the crisis situation in a timely and suitable manner. Notwithstanding the downfall in the revenues of the company, the importance of J.P. Morgan Chase & Co. in the US and global financial system cannot be undermined, and as Gongloff (2012), in his article in Huffington Post states that, “With its size, reach and critical role in the still-thriving shadow banking system, JPMorgan will almost certainly play some role in the next financial crisis, whenever it happens.” (Gongloff, 2012). List of References Clark, A., 2008. JP Morgan and Wells Fargo announce big fall in profits. [Online] Available at: http://www.theguardian.com/business/2008/oct/15/useconomy-banking-jpmorgan-wellsfargo [Accessed 27 November 2013]. Gongloff, M., 2012. JPMorgan Chase: The Great White Whale Of The Global Economy. [Online] Available at: http://www.huffingtonpost.com/2012/04/12/jpmorgan-chase-the-great-white-whale_n_1421323.html [Accessed 27 November 2013]. J P Morgan Chase & Co., 2007. Annual Report. Financial Statements. New York: J P Morgan Chase & Co. J P Morgan Chase & Co., 2008. Annual Report. Financial Statements. New York: J P Morgan Chase & Co. J P Morgan Chase & Co., 2013. Asset Management. [Online] Available at: https://www.jpmorgan.com/pages/jpmorgan/am [Accessed 27 November 2013]. J P Morgan Chase & Co., 2013. Businesses. [Online] Available at: https://www.jpmorgan.com/pages/jpmorgan/about/businesses [Accessed 26 November 2013]. J P Morgan Chase & Co., 2013. Treasury Services. [Online] Available at: https://www.jpmorgan.com/tss/Home/Treasury_Services/1102086506985 [Accessed 27 November 2013]. Sears, S.M., 2012. The Bulls are Circling JPMorgan. [Online] Available at: http://online.barrons.com/article/SB50001424053111904857404577339733845648696.html [Accessed 27 November 2013]. Yahoo Finance, 2013. Business Summary. [Online] Available at: http://finance.yahoo.com/q/pr?s=JPM+Profile [Accessed 26 November 2013]. Read More