JPM recorded 'extraordinary gains' from its acquisition of Washington Mutual.
Sounds good, doesn't it?
Well it's not, at least if you are a JPM shareholder.
Here's why: the main basis for Washington Mutual's lawsuits against both JPM and FDIC is that Washington Mutual did not receive 'fair value' for its assets that were seized and transferred to JPM. And guess what? JPM's financial statements confirm that claim.
JPM: in the acquisition of Washington Mutual Bank, "the fair value of the net assets acquired exceeded the purchase price".
Conclusions: -- Because in the acquisition of WMB "the fair value of the net assets acquired exceeded the purchase price", this resulted in "negative goodwill", which resulted in an "extraordinary gain" on JPM's books. -- For the 3rd quarter of 2008, this extraordinary gain changed what would have been a net income loss of 8 cents per share into a gain of 9 cents per share. -- For the 4th quarter of 2008, this extraordinary gain changed what would have been a net income loss of 29 cents per share into a gain of 6 cents per share. -- These numbers reflect only the "extraordinary gain" resulting from the "negative goodwill". JPM projected in its 1st quarter 2009 10-Q that overall: "...the net income impact of Washington Mutual’s banking operations could be approximately $0.50 per share in 2009."
What is "negative goodwill" (from 7/16/09 WMI D.C. filing)? Roman L. Weil & Michael W. Maher, Handbook of Cost Management 95-96 (2d ed. 2005): defining “negative goodwill” as “[w]hen a firm acquires another company, and the fair market value of the net assets acquired exceeds the purchase price . . . For negative goodwill to exist, someone must be willing to sell a company for less than the fair market value of a net current assets and marketable securities. Because such bargain purchases are rare, one seldom sees negative goodwill in the financial statements . . . .”
Extraordinary gain(c) per quarter from WMB acquisition: 3Q08 = $581 M 4Q08 = $1325 M 1Q09 = $0 2Q09 = $0 3Q09 = $76 M Thus total extraordinary gain from WMB acquisition = $1.982 billion
Page 3, DILUTED EARNINGS PER SHARE: 3Q08: -- (8 cents) = income (loss) before extraordinary gain -- 17 cents = extraordinary gain from WMB acquisition -- 9 cents = net income
4Q08: -- (29 cents) = income (loss) before extraordinary gain -- 35 cents = extraordinary gain from WMB acquisition -- 6 cents = net income
3Q09: -- 80 cents = income (loss) before extraordinary gain -- 2 cents = extraordinary gain from WMB acquisition -- 82 cents = net income
Earnings Release Financial Supplement — Third Quarter 2009, Exhibit 99.2: begins about one quarter of the way down. Page numbers are from that exhibit section.
Page 3, STATEMENTS OF INCOME: Footnote (c): "JPMorgan Chase acquired the banking operations of Washington Mutual Bank for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with U.S. GAAP for business combinations, nonfinancial assets that are not held-for-sale were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain."
While you are correct about the data, you still seem to miss that it was the government that "produced" and at least partially indemnified the JPM transaction. JPM did not control the sale. The government could have controled the price but did not. The resulting negative goodwill was actually the result of a govenment decision.