JP Morgan Chase 2010 Annual Report Download - page 17

15
The WaMu Acquisition: A Bit Worse than Expected but Clearly Still Worth It
With more than two years’ perspective, I’d like to
take a look back at how we did with the acquisition
of Washington Mutual — particularly relative to how
we thought the deal would play out at the time of
the acquisition.
WaMu’s ongoing operating earnings were
approximately what we expected — but not in
the way we expected
When we completed the WaMu acquisition on
September 25, 2008, we thought it was financially
compelling and immediately accretive to earn-
ings, though clearly not without risk. We acquired
WaMu’s 2,200 branches, 5,000 ATMs and 12.6
million checking accounts, as well as savings,
mortgage and credit card accounts. At that time,
we estimated that it would add $3 billion to 2010
net income.
The chart above shows what we said would happen
over time vs. what actually happened. These
numbers do not include one-time gains or losses,
which I describe in the following paragraph. In
the numbers above, the mortgage origination and
servicing business did better than expected, mostly
due to higher volumes and spreads. And the retail
business did significantly worse, mostly due to
curtailing fees on nonsucient funds and over-
drafts. We expect the business to perform in the
future as we originally thought.
One-time, after-tax gains and losses are a
negative and still could get slightly worse
When we acquired WaMu, we acquired approxi-
mately $240 billion of mortgage and credit card
loans, which we immediately wrote down by $30
billion. We knew when we did the transaction that
the depth and severity of the recession in the
housing market could drive mortgage losses even
higher than our estimates (which, at the time, we
thought were conservative). We thought losses
could wind up being $10 billion worse (pretax), and
we have experienced about half of that. We antici-
pate some further potential downside, depending
on the health of the U.S. economy, as well as some
other one-time gains and losses relating to litiga-
tion and other unresolved matters. The heritage
WaMu credit card business essentially is liquidating
with approximately the results we expected.
The WaMu acquisition has created future
opportunities that we would not have had if
we did not do this acquisition — and these are
better than we anticipated
The expansion of our Middle Market Commercial
Banking business, within the WaMu footprint,
which we are managing and growing carefully, can
deliver more than $500 million in pretax profits
annually, though this could take more than five
years. And the Commercial Term Lending Busi-
ness, which essentially is making mortgage loans
on multifamily houses — a business we previously
didn’t know very well — also will be able to grow
its earnings to more than $500 million a year —
significantly better than we expected. We think the
Small Business Banking opportunity is even larger
than we thought and could be as much as $1 billion
pretax annually over the long term.
One-Time Items (After-Tax)
 
 
 
Operating Earnings, Excluding One-Time Items
(in billions)
Initial
Expectations Actual
2009 $2.4 $2.8
2010 3.0 2.7
2011 3.4 3.1 *

15