JPMorgan profits by assuming housing market is improving

For all the talk about JPMorgan Chase’s giant trading loss — which CEO Jamie Dimon pegged this morning at $5.8 billion, and could eventually exceed $7 billion — the firm posted a nearly $5 billion profit last quarter. According to the New York Times, a significant portion of that profit can be attributed to the firm’s own perception on the state of the housing market.

The bank sets aside money it assumes will be lost because of bad mortgage loans it originated before the housing market went belly up. But this quarter, JPMorgan removed $1.4 billion from those presumed losses because it said mortgage delinquency trends are improving and as a result it also assumed it would spend less on borrower assistance programs. Further, the bank reduced the amount of flawed mortgages it assumed it would buy back from Fannie Mae and Freddie Mac by $216 million.

The Times said Dimon told earnings conference call listeners that those loss reductions were based on conservative estimates.

The accounting maneuver is either another sign of the banking industry’s disclosure flaws or that a national housing recovery is truly underway. [NYT]