Just remember that one of the causes of the financial crisis was mark to market accounting. As those leveraged assets decreased in value the company would have to post more and more capital essentially opening the wounds for massive financial bloodletting. IMO, JPM could say that the only reason why they've made so much money off the portfolio is b/c of their ability to absorb the write-downs necessary according to mark-to-market. (No need to argue w/me about JPM's or WaMu's financial condition please).
I think you get the point but another analogy to what JPM will argue IMO: person A goes bankrupt while renovating a mansion b/c he can't get capital after the bank calls in one of his loans b/c he can't pay more cash collateral. The mansion will only need 1MM more to renovate to allow person A to make a 5MM profit. Person B swoops up that property at a fire sale price and finishes the job making a huge profit b/c person B was in a financial position to take on the project. Now, does person B owe person A money even though A added value but wouldn't have been able to finance the deal? I think that's the position that FDIC and JPM are going to take even if A>L.
As you know, many people go bk when A>L b/c of liquidity issues/lack of capital. Bottom line is, my ten homes with positive cash flow and with equity in them doesn't help me if the bank's calling in my loan and I have 30 days or less to respond (similar to a mark-to-market scenario).
This is one of the main reasons why I think an exchange will occur with the commons and that the pref's will just be absorbed onto the balance sheet as long/term debt that will be used to balance more loans (assets) for JPM.
Also, can someone post a link that shows how much JPM has made off the WaMu portfolio? I've heard they're making 2BB/month off the portfolio but looking at the I/S they only made 11.7BB last year.
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