Chase Still Sees Subprime Opportunities

James Dimon, chairman, president and chief executive officer of the company, gave his assessment at the Credit Suisse Financial Services Forum on Feb. 7.

He said there is no pressure for JPMorgan, which has been rumored to be considering an purchase of Washington Mutual, to do any acquisitions. But the investment banking giant would consider an opportunity at a fair price based on good business logic and its ability to execute the transaction.

The New York-based company, which eliminated Alt-A broker programs last month, holds about $6.4 billion in slightly marked down AAA Alt-A investments, Dimon said. It holds $15.5 billion in mostly AAA commercial mortgage-backed securities. And while CMBS is a new category of concern, most of the AAA CMBS is “pretty good.”

He noted that new underwriting standards have hurt production by between 30 and 40 percent. The company reported $207.7 billion in 2007 originations. He explained that the worst losses in any category of underwriting have been suffered from its broker business.

Dimon told investors in January 2007, shortly after he became chairman, that Chase was shedding about $4.5 billion in subprime inventory. In that presentation, he prophetically said “subprime will continue to have problems” and suggested the problems may be signaling a recession.

“But at the end of the day we’re an economic animal … and I’d have no problem buying $10 billion more (in subprime loans) if we can buy at a discount,” Dimon said at the time.

The following June, JPMorgan said it would expand its correspondent operations by adding a subprime flow process.

At last week’s conference, Dimon said the company is still putting subprime and jumbo loans on its balance sheet and will take advantage of “very attractive opportunities” for its investment portfolios and investment bank.

“We’re still doing subprime even though we’ve massively tightened up the underwriting and home equity,” he said. “But our share in the mortgage business [has] gone from 5 percent to something North of 10 percent. We like the business. It’s still one of the biggest financial markets and most important products in the country.”

The company, which has largely remained unscathed by the subprime meltdown, held $2.7 billion in subprime investments as of Dec. 31, including more than $1.2 billion in asset-backed securities, $0.7 billion in warehouse whole loans, and $0.2 billion in collateralized debt obligations, Dimon said.

“We own a lot of this Chase subprime and Chase bonds, which perform a lot better on average than the ABX,” he explained, adding, “I think we’re getting near the end here because I don’t think there’s too much more pain you can have in this category.”

He said Chase hedges its subprime investments, though Chase loans perform better than the ABX index and don’t need a hundred percent hedge ratio.

“I personally think that subprime is not a bad thing,” he said. “It’s something that went to excess, and we’ll continue grow and offer the product in hopefully a much safer way.”

He said the company’s subprime holdings will continue to grow — at least a little bit.

The company announced earnings of $15.4 billion last year — despite massive losses reported by some of its peers.

“I think we’ve lived through the most benign credit environment you will ever see in your lifetime in consumer and wholesale credit,” he said. “That is gone.

“We’re going back to norm and, in fact, as a recession, it’s going to get worse than that.”