James Dimon: We would not do a deal or not do a deal based upon pure accounting like that. We would do a deal or not do a deal based upon how much value we thought it added to shareholders.
Betsy Graseck (Morgan Stanley): You did sell down a dramatic amount Bear Stearns assets relative to prior expectations. How much more do you anticipate reducing from here?
James Dimon: I would not look at it like they are Bear Stearns assets anymore because these books are combined and run by a consolidated management team at this point, but if you look at the mortgages, leveraged finance, and some other categories that we did not spend time on they will be coming down over time.
Betsy Graseck (Morgan Stanley): As you executed that selldown of assets, did that at all help the trading line?
Michael J. Cavanagh: No. I would think of that as liquidation is a large contributor to consuming the book value that we were talking about earlier between write-downs and operating losses as we deleveraged.
Betsy Graseck (Morgan Stanley): How are you thinking about the dividend policy given the strong capital ratio that you ended the quarter at and well above?
James Dimon: We applaud our friends at Wells Fargo, but we do not have that much guts going forward. We bear some more risk and we are not going to create the dividend until we see clear daylight.
William Tanona (Goldman Sachs): If you looked at Bear Stearns prior to this deal, the equity was at $11.5 billion, and they were far greater levered. Looking at how much it took risk-weighted assets down, it is about 45%. If you keep the same leverage ratio, it implies $6.5 billion of equity. Why you only allocated the $4 billion to the Investment Bank?
Michael J. Cavanagh: We took equity up in anticipation of all this by $1 billion in the first quarter from $21 to $22. Remember also that our allocated equity is just allocated common equity, so when you look at pure comparisons you have got to add a share of the non-common equity component to the firm''s capital to get to the real denominator when you do some of the calculations that are often done. We go through all that. When we do our own internal compares of capitalization to get to stand-alone single A type of ratings, you have got to parse through versus our competitors that hold asset management businesses, private equity businesses, etc., inside their overall units. When doing a comparison of our Investment Banking unit to those, you have some parsing to do to arrive at what real pure comparisons look like. On all that kind of basis, we get to a place that we feel like is appropriate, and we continue to watch it and look beyond just the nominal levels and look at some risk weightings and our sense of where risk sits and compare to economic capital calculations internally as well.
James Dimon: Our Tier 1 has a much higher component of common equity, which you could say is higher quality Tier 1. Across the board, we try to be conservative. I always talk about quality of capital, which is a peculiar concept, but loan loss reserves are strong. Our BOLI/COLI is strong. We are massively over reserved by a couple of billion dollars in our pension plans. We got out of the auto leasing business. Our card IO is small. It is across the board. You can look at all these things and call us conservative. We believe in maintaining a strong balance sheet on all counts, not just drawing Tier 1 but all these other things.
William Tanona (Goldman Sachs): What is it about your prime mortgage portfolio that you expect losses could potentially triple from here?
James Dimon: You saw subprime go first, and then, on a lag, you saw home equity, and now in the lag you are seeing prime go. It is exactly the same lost factors. The components of where we are in the states and all the stuff like this, it is different. We started doing more jumbos in 2007, so part of that is 2007 vintage, which at the time we are going to do and grow a balance sheet and gain share. We were wrong. We wish we had not done it. When you adjust for all of those things - vintages, CLTV, stated income, where it is done – that is what we are seeing.
Michael J. Cavanagh: It is the same as our guidance on home equity was. It is where things could go depending on a set of views internally.
Jeff Hart (Sandler O’Neill): When you talk about deterioration of the prime mortgage, it is dominated by jumbo and Alt-A. How the jumbo bucket is performing versus the Alt-A versus?
Michael J. Cavanagh: We have significant ratcheted back our underwriting standards in prime to be fundamentally much more of a traditional underwriting standards, much less stated income, LTVs from here that are targeted to not be in excess of the expected home price in given areas. We are in some parts of the country max LTV currently at 65%, etc., etc. When you layer that through and look at our portfolio split between the balances that we would continue to underwrite on our given standards and those that we would not, for what we would continue to underwrite the existing credit performance is substantially lower than its overall level of 91 basis points of loss. We feel confident that our current underwriting is wholly different than what has been already underwritten with the risk factors. One of the real drivers is home prices. In some of the areas where we put on loans has come down so substantially that where we were in situations of not relying on mortgage insurance, home values have dropped even below 80% original LTVs, so we are taking losses.
Jeff Hart (Sandler O’Neill): Is prime going to that level a function of over three-quarters of your portfolio being jumbo and Alt-A versus the overall housing market?
James Dimon: It may be. That is all we have so we do not have a great compare point because that is the preponderance of what we have in portfolio.
Jeff Hart (Sandler O’Neill): Are you seeing better performance away from jumbos?
Michael J. Cavanagh: I do not have a good compare point inside of the portfolio because that is the preponderance of what we have on balance sheet. Conforming stuff goes straight out the door to the agencies and does not stay on balance sheet.
James Dimon: The jumbos are more proportionately California, too, so that has a lot to do with it.
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