Updated from 8:45 a.m. EDT.
Sharp-tongued analyst Richard Bove on Tuesday turned his ire to
, one of the few bright spots in the troubled financial sector during the credit crisis.
The veteran Ladenburg Thurmann analyst, known for his critical research notes on the banking industry, says JPMorgan's strategy of having two supposed "contra-cyclical" businesses -- consumer finance and capital markets -- has "broken down." He slashed his earnings estimates for the firm by 23 cents this year to $2.23 a share and by 12 cents next year to $2.77 a share.
Bove published his note a day after the New York bank said in a regulatory filing that is expects to write off $1.5 billion in mortgage-backed securities in the third quarter, due to the continued deterioration in the credit markets.
Trading conditions have substantially deteriorated thus far in the third quarter, widening spreads on mortgage-backed securities and loans, JPMorgan said in its quarterly filing with the
Securities and Exchange Commission
. The writedowns would exceed the
$1.1 billion in writedowns
reported in the second quarter, it added.
"The investment bank continues to be negatively affected by the disruption in the credit and mortgage markets, as well as by overall lower levels of liquidity and wider credit spreads," JPMorgan said in the filing. "The continuation of these factors could potentially lead to reduced levels of client activity, lower investment banking fees and lower trading revenue."
JPMorgan Chase is also feeling the pain on the consumer side of the business. The company has warned of large losses in its home equity business and more recently in its jumbo prime mortgage book. Still, compared to other banks, it has managed to avoid a large part of the pain from the credit crisis and ensuing housing downturn.
JPMorgan shares fell more than 9% and also fueled the financial sector downward on Tuesday.
"The concept behind the creation of J.P. Morgan Chase has broken down," Bove writes in a note. "It may be recalled at the time legacy J.P. Morgan purchased legacy BankOne, which in retrospect was a reverse merger, it was believed that a contra-cyclical entity was being created. Bill Harrison, J.P. Morgan's
then CEO repeatedly argued that the combination of a consumer finance bank with a capital markets company would be placing two contra-cyclical businesses together defeating the cycle.
"Unfortunately, the first time this concept was tested, it did not work. Both cycles seem to be declining in tandem with each other. Moreover, by buying the failing
, JPMorgan may have accentuated the negative impact of the capital market downturn," Bove adds. "This is as close to the perfect storm as the bank can get. It will not subside until well into 2009. No company no matter how well managed can avoid being impacted by weaknesses in its core business."
Jason Goldberg, an analyst at
, also slashed estimates on JPMorgan Chase by 25 cents for the third quarter to 42 cents a share and by 30 cents this year to $2.30.
"Note, a $1.5
billion mark on a $21.4
billion book, equates to 7%," Goldberg writes. "We note this is a mark-to-market hit and will likely change as the quarter progresses."
The news comes a day after the bank took another hit, as New York Attorney General Andrew Cuomo
with investors for its role in overstating the safety of auction-rate securities. Cuomo singled out JPMorgan,
just days after helping broker settlements with
in the same probe.