J.P. Morgan Profit Surges as Fortunes Revive on Wall Street

The economy was still doing fine when Wall Street began its plunge into crisis two years ago. Now Wall Street is humming along as most everyone else suffers.

J.P. Morgan Chase said yesterday that it earned $2.72 billion in the second quarter, as the success of its investment bank outweighed problems in its commercial bank. Investment bank Goldman Sachs reported the most profitable quarter in its history earlier this week. Even struggling Bank of America and Citigroup are expected by analysts to highlight their Wall Street operations as a bright spot when they report earnings today.

The strong earnings are not evidence that the banking industry has returned to health. Banks continue to lose vast sums as borrowers default on loans, a trend increasingly driven by rising unemployment.

But the business of investment banking, historically centered on Wall Street, has returned to profitability in part because surviving companies have fewer rivals. Another plus: Firms had earlier recorded huge losses on many investments expecting that the recession would get much worse. The recession has not reached those projected depths, allowing the banks to report that their portfolios are looking better, too.

"It's a huge help for them," said Michael Williams, a financial analyst at Gradient Analytics. "All of a sudden you've got gains instead of losses on securities."

J.P. Morgan's second-quarter profit topped by 36 percent the $2 billion it earned during the same period last year, although earnings per share fell to 28 cents from 53 cents because of a heavy issuance of new shares.

The company's investment bank produced more than half the profit. Its revenue from helping companies sell shares roughly doubled as some investors returned to the market. The company also faced less competition after the demise of Wall Street firms such as Lehman Brothers. J.P. Morgan also nearly doubled revenue from investment in financial instruments such as bonds and mortgage-backed securities.

Michael J. Cavanagh, the company's chief financial officer, said he was "very proud of those results."

The giant New York bank had a much tougher time in the business of retail and commercial banking. The rate of losses continued to increase in nearly every category of consumer lending, including credit cards and mortgages. Despite those increases, the company set aside slightly less money to cover future losses, improving its short-term results. Executives said the decision reflected signs that defaults might soon begin to moderate, provoking skepticism from some financial analysts.

"The company feels relatively confident that a change is coming here but there is no evidence of this in the numbers," wrote Richard Bove of Rochdale Research.

J.P. Morgan's recent results have given it a competitive advantage over some of its surviving rivals. The company repaid $25 billion in federal aid last month, freeing it from pay restrictions and limits on hiring foreign workers that still apply to Bank of America, Wells Fargo and Citigroup.

The company also is less subject to other forms of federal involvement. Bank of America and Citigroup both are operating under elaborate and restrictive agreements with federal banking regulators that affect everything from executive appointments to corporate strategy.

J.P. Morgan continues to rely, however, on other federal rescue programs, including money borrowed with help from the Federal Deposit Insurance Corp. and from various emergency programs created by the Federal Reserve, including one created specially to reduce the cost of its acquisition last year of crippled investment bank Bear Stearns.

The company's relative success is changing the tone of its relationship with the government. In return for providing aid, the Treasury Department had received warrants to purchase stock in the company. J.P. Morgan wants the government to sell the warrants but has balked at the Treasury's asking price, calling it too high. Instead, the company plans to let the government auction the warrants to private investors.

The company also is taking an increasingly public role in the debate over how to reform financial regulations. In a recent opinion piece, chief executive Jamie Dimon warned against overly restrictive regulations on the sale of derivatives, which can be used to manage financial risks or to gamble. J.P. Morgan is one of the largest participants in that market.