The new purchase-accounting rule offers the banks with accretable yield – the difference between the price of the loans on the banks’ balance sheets and the cash flow they are expected to create.
When JPMorgan purchased WaMu for $1.9 billion last September, it used purchase accounting that allowed it mark down $118.2 billion of assets by 25%. Now, as borrowers repay, the bank says it stands to gain approximately $29 billion over in pretax income before taxes and expenses.
Robert Willens, a former Lehman Brothers executive who runs a tax and accounting consulting firm, said: “the banks are taking advantage of a four-year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that have lost much of their value, the banks should be able to gain a considerable amount of revenue.”
JP Morgan is not the only bank that is going to bolster its balance sheet, Wells Fargo purchase of Wachovia, Bank of America’s buyout of Countrywide Financial and PNC Financial Services’ purchase of National City are all expected to provide a combined $56 billion so-called accretable yield to the owners.
However, the extent of JP Morgan’s windfall may have some downside as last vestiges of holding company of WaMu, that was not sold is suing the FDIC and JP Morgan for selling it before it could find a buyer.
