JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.
Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.
The purchase accounting rule used by the aforementioned firms encourage them to mark down loans and then allow recording income from cash flows received from those loans. Breaking down the benefits of each firm, JP Morgan as already mentioned stands to benefit the most with $29.1bn while Wells Fargo and Bank of America could expect some $10bn and $14.1bn in extra income.
This profit has the potential of raising eyebrows yet again from critics just like they did when most of the banks reported better-than-expected profits during the first quarter of the year – with a big part of earnings coming from one-time gains.