In the land of the subprime blind, a mere $1.3 billion writedown is making CEO Jamie Dimon's JPMorgan Chase ( JPM) king. At least, that is the view that investors appear to be espousing after the bank, the third largest in the U.S. in terms of deposits, reported fourth-quarter earnings that showed signs that the U.S. economy is weakening, but set it in stark contrast to its mortgage-laden, cash-strapped competitors. JPMorgan's stock soared as high as 8.9% to $42.65 in Wednesday trading, even after it reported that
fourth-quarter profits fell by 34% on net income of $2.97 billion, or 86 cents a share, in the fourth quarter. During the same period last year, it reported net income of $4.53 billion. On Tuesday, Citigroup ( C) reported that it would slash its dividend by about 40%, write down $18.1 billion in debt and raise $14.5 billion in much-needed funding from investors, including ex-CEO Sandy Weill and Saudi billionaire Prince Alwaleed. Another major firm, Merrill Lynch ( MER) is expected to report a writedown of as much as $15 billion on Thursday, when it reports fourth-quarter earnings. In anticipation of the big hit, Merrill CEO John Thain on Tuesday said the firm had raised some $6.6 billion from foreign investors. Merrill shares closed up more than 3.9% at $55.09 Wednesday, while Citi shares dipped 2.4% to a 52-week low of $26.24. JPMorgan closed up 5.8% to $41.43. In the case of JPMorgan, investors will be heartened not just by the relatively small scope of its charge-offs and its healthy cash flow compared to its rivals, but also by the likelihood that Dimon and company will take advantage of its peers' misery to beef up in areas including mortgages. "We're going to continue to build this business even if it causes some problems in the short term," said Dimon during an analyst earnings call, explaining JPMorgan's intent on boosting its market share in mortgages. "We're going to build one of the best mortgage businesses on the Street," he noted, adding that JPMorgan would "keep on marching" despite the upheaval in the markets. So far, upheaval in mortgages has claimed a number of victims, including embattled mortgage lender Countrywide Financial ( CFC), which agreed to be purchased by Bank of America ( BAC) last week, to stave off the more likely scenario of bankruptcy or having to delist from the New York Stock Exchange amid a plummeting share price. Dimon has been unequivocal about his view that JPMorgan could take advantage of the mortgage casualties, and most believe that the executive's ability to thus far manage risk will prove invaluable as the U.S. looks down the barrel of a recession. "Basically investors are betting on Jamie Dimon and saying that he's a smart guy," says Walter O'Haire, senior bank analyst at Boston-based consulting firm Celent. "He's proved that he's doing the right things and he's the guy to bet on." Investors' bullish bets on Dimon underscore the differences between JPMorgan and its once-larger rival Citi, with which it competes directly. JPMorgan's market cap stands just under $140 billion, compared with about $131 billion for Citi, as of late Wednesday. A protégé of former Citi CEO Sandy Weill, Dimon finds himself in the ironic position of boasting a market capitalization that exceeds Citi's and eyeing a chance to grow the JPMorgan franchise further while Citi flounders. On the company's earnings call, Dimon was cautious about the outlook for the firm and the economy, but was forthcoming about the JPMorgan's balance sheet and relayed a clear message on the firm's future. The same can't be said about Citi's new CEO Vikram Pandit, who left investors with more questions than answers. Responding to a question about JPMorgan's desire to acquire another financial institution in 2008, Dimon said during the call that the current environment "just may make it more likely."
"I think in terms of either buying assets or buying companies, we're very open-minded and we figure we can do the right kind of due diligence and understand the values and that we're giving the value that we're getting, we would be very happy to do it," Dimon explained. As for the economy and the housing market, Dimon and CFO Michael Cavanagh said that the firm predicts depreciation in housing prices of about 5% or 10% in its core markets, even if a recession does not take hold of the market. Dimon noted that JPMorgan has significantly increased its underwriting standards. "We like the business and we've just gone back to old-fashioned, tougher standards," he said.