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The Week’s Business News in Pictures

A demonstration on Friday outside the offices of Standard & Poor’s in Paris. Standard & Poor’s  stripped France of its sterling credit rating, cut Portugal’s credit to junk status and downgraded Italy’s debt by two steps in a wide-ranging revision of European countries caught in the euro crisis.

Tags: Business, Pictures, Weeks

DealBook: Weak Quarter Weighs on JPMorgan’s 2011 Profit

Justin Sullivan/Getty ImagesJPMorgan Chase’s credit card business and commercial lending operation showed signs of improving.

JPMorgan Chase kicked off bank earnings season on Friday with news that its quarterly profit dropped 23 percent last year, results that weighed on the full-year profit.

The bank turned a $19 billion profit in 2011, up 9 percent from $17.4 billion a year earlier, as its credit card business and commercial lending operation showed signs of improving. The results amounted to $4.48 a share, up from $3.96 a share last year.

But the profit engine stalled in the fourth quarter, when JPMorgan earned $3.7 billion, or 90 cents a share, down 23 percent from the same quarter a year earlier. The results matched analysts’ estimates for the period.

The fourth-quarter slump was owed in part to declining revenue and a slowdown in JPMorgan’s sprawling investment bank, which suffered from the sluggish economic recovery in the United States and concerns that the European debt crisis would sweep across the Continent.

The investment bank booked a $567 million accounting loss in the fourth quarter tied to the perceived riskiness of its own debt, reversing a one-time gain from the previous quarter that propped up earnings across Wall Street. In all, the unit’s profit sank 52 percent to $726 million in the fourth quarter.

Shares of JPMorgan were down more than 3 percent, to about $35.55, in morning trading.

Despite the turmoil in the fourth quarter, Jamie Dimon, JPMorgan’s chairman and chief executive, highlighted the firm’s gradual progress since the financial crisis. He also sounded a note of cautious optimism about the broader economic recovery.

“We have a mild recovery that might actually be strengthening,” Mr. Dimon said in a conference call with reporters, adding that the comeback appears to be “broad.”

The bank’s earnings report comes a day after Mr. Dimon announced the second major shuffling of his management team in a year. Among the changes, Jay Mandelbaum, head of strategy and business development, will leave the bank. And Barry Zubrow, JPMorgan’s risk management chief who guided the bank through the financial crisis, will now head corporate regulatory affairs.

With the steady growth in profit last year, JPMorgan has emerged from the crisis as one of Wall Street’s most dominant firms. In 2011, JPMorgan stripped Bank of America of its title as the nation’s biggest bank by assets. Bank of America is still struggling to shed the legacy of the subprime mortgage mess.

“JPMorgan is in the best position for no other reason than they don’t have the troubles that Bank of America has,” said Jim Sinegal, an analyst with the research firm Morningstar.

While JPMorgan had some recent bright spots in its core businesses, the gains were padded by the bank’s decision to set aside $730 million in fewer reserves for loan losses. Additions to the reserve are an expense.

Much of the change came from reserves held for the bank’s credit card portfolio, which has steadily improved. The move also benefited Chase Retail Financial Services, the bank’s consumer banking arm that offers everything from mortgages to checking accounts. The unit earned $533 million in the fourth quarter, up from $459 million a year earlier.

Commercial lending was a particular strong point for the bank. The unit’s profit rose to a record $643 million, a 21 percent increase from the prior year, as lending to corporations grew for the sixth consecutive quarter.

“I believe that you are seeing real loan growth,” Mr. Dimon said on the conference call. “And I think that will continue.”

But his bank’s earnings improvement last year was overshadowed by the fourth-quarter woes and a drop in revenue. Revenue fell to $99.8 billion, down from $104.8 billion last year, as new federal rules reined in fees tied to overdrafts and debit cards. The $567 million accounting loss also weighed down revenue.

The revenue struggles are not unique to JPMorgan, a diversified bank seen as a gauge for the performance of Wall Street. When the nation’s other big banks — Goldman Sachs, Morgan Stanley, Citigroup and Bank of America — report earnings next week, most are expected to detail similar slowdowns in revenue.

“It’s hard to think of a bright spot on the revenue side,” Mr. Sinegal said. “That issue is going to linger.”

Tags: DealBook, JPMorgans, Profit, Quarter, Weighs

Media Decoder Blog: Deal Would Lead Letterman to a Late-Night Milestone

Paul Drinkwater/NBC, via Associated PressDavid Letterman as a guest on “The Tonight Show” with his idol, Johnny Carson. It appears that he will extend his contract, and surpass Mr. Carson’s 30 years as a late-night host.

PASADENA, Calif. – It appears increasingly likely that David Letterman will extend his contract, pushing him past the 30-year run of his idol, Johnny Carson.

According to executives who have been involved in discussions with Mr. Letterman’s production company, Worldwide Pants, a deal to remain on the air until 2014 is imminent. The executives said that CBS had authorized the company to make new agreements with the key members of Mr. Letterman’s staff, his producers and writers.

“That means a final deal with Dave is very close,” said one of the executives involved in the negotiations, who asked not to be identified because the deal is not yet ready to be announced.

What remains unsettled, according to several executives, is the future of the host of CBS show that follows Mr. Letterman, Craig Ferguson. There remains a possibility that he will choose not to continue, the executive involved in the negotiations said.

For many months, people close to Mr. Letterman said he had decided not to retire this year, as had been rumored when he agreed to his last two-year extension in 2010. Instead, Mr. Letterman has given indications for months that he was leaning toward staying on the job, hosting the show called “Late Show With David Letterman.”

Mr. Letterman joined CBS in 1993, after an 11-year career in late-night at NBC. Next year, will be his 20th year at CBS. If he works until the end of the extended deal he will have been on the air for 32 years in late night, two more than Mr. Carson’s record run at NBC’s “Tonight” show.

Leslie Moonves, the CBS chairman, said he would not comment on the status of the late-night talks. One senior CBS executive said only that the network expected a satisfactory conclusion to the late-night situation.

Mr. Letterman’s current deal expires in August, though it contains a window for him to exit in May. (May is the end of the standard television season and more logical exit point than August; Mr. Carson left in May 1992, after 30 years.)

The issue surrounding Mr. Ferguson is whether he will come to terms to continue in the 12:35 a.m. time slot. CBS is expected to seek to keep him, and he does have a clause in his contract that would guarantee him the 11:35 show if Mr. Letterman chose to step down.

But Mr. Ferguson has never taken the position that he must inherit the earlier time period by a certain time, an issue that has clouded previous late-night transitions at NBC.

Instead, the issue of whether Mr. Ferguson will stay at CBS or seek a new direction in his career is expected to come down to whether CBS improves his salary, and perhaps improves the production budget for his “Late Late Show.”

Tags: Decoder, LateNight, Letterman, Media, Milestone, Would

Wealth Matters: Deciding Who’s Rich (or Smart) Enough for High-Risk Investments

But it has broader implications. Should the United States government be deciding what people can do with their money? And how do you define who is wealthy enough — and smart enough — to invest in these offerings?

We’re talking about private placements — a term the financial industry uses for anything from real estate deals to hedge funds to last year’s much-talked-about offering in Facebook shares. What all these investments have in common is that they can be sold with fewer disclosures than public offerings.

They also often carry cachet, and those who get into them can end up with large returns. That may seem unfair to anyone excluded because of a lack of wealth. But these private investments can go to zero just as easily as they can climb into the stratosphere, which is why investors who cannot afford to lose a lot of money are barred.

Since 1982, specific dollar amounts have been used to define who is an “accredited investor,” the S.E.C.’s term for someone deemed sophisticated enough to invest in these nonpublic deals.

The two most commonly used measures are annual income — over $200,000 for an individual or $300,000 for a couple — and net worth, which was $1 million. In late December, the S.E.C. redefined how people should calculate their net worth. Per the requirements of Dodd-Frank, the commission removed the equity in a person’s primary residence from consideration. (But if the value of that house is less than the mortgage, that liability needs to be included.)

“It’s an interesting question as to why this qualifies someone as sophisticated,” said Robert E. Buckholz Jr., a partner at Sullivan & Cromwell. “The income and the net worth requirements are a proxy for the ability to fend for yourself.”

But also in compliance with Dodd-Frank, the S.E.C. will spend the next three years determining whether to make further changes in the accredited investor requirements. While it is hard to say what the review will produce, it is worthwhile to look at how wealth and financial expertise have been confused.

WHAT THE RULE DOES In a 2009 article in The Washington University Law Review, Wallis K. Finger, now an associate at Schulte Roth & Zabel, used humor to lay out the problem of using money as a proxy for sophistication.

“Paris Hilton almost certainly can purchase unregulated securities issued by hedge funds or other private investment vehicles,” Ms. Finger wrote. “Although her training and sophistication in the field of high-stakes financial transactions may be limited, the Securities and Exchange Commission would leave her to her own devices if she chose to invest in private offerings.”

For comparison, she created a woman named Sheryl who has a master’s degree in business from Harvard and a doctorate in financial systems analysis. “After all of this schooling, Sheryl is long on debt and short on assets,” Ms. Finger wrote. “She has several offers to work at the nation’s most prestigious investment brokerages. But if Sheryl wants to invest in a private offering, the S.E.C. regulations will not allow it.”

In other words, using money as a stand-in for financial sophistication is a fairly unsophisticated solution.

When news leaked out last year that Goldman Sachs was planning to offer private shares in Facebook to its wealthiest clients, there was outrage from people who were excluded. After much media attention, the firm limited the private offering to overseas clients to be sure it complied with S.E.C. regulations. (Anyone will be able to buy shares in the initial public offering of Facebook.)

In reality, most private offerings are far less glamorous and carry significant risks.

Barbara Black, a professor and director of the corporate law center at the University of Cincinnati College of Law, said she was more concerned about small offerings, like a local real estate partnership, where an entrepreneur tries to raise money by promising outsize returns to investors in the community.

“It may be perfectly fine, but the nature of things is that these are risky,” Ms. Black said. “You see litigation involving people who are wealthy, but you don’t think of them as super-rich — doctors, dentists, lawyers, some accountants. Are these really sophisticated investors?”

DOES IT WORK? The accredited investor regulation is by design paternalistic, but its arbitrariness is what bothers people.

Originally, the Securities Act of 1933 aimed to provide more information on securities to prevent investors from being manipulated. Those who were exempted from these requirements were believed to possess enough knowledge to make informed choices.

Using the example of doctors and lawyers investing in a local real estate deal, Yasho Lahiri, a partner at law firm Baker Botts in New York, said investors would be better protected with more disclosures, not by their degree of wealth.

Tags: Deciding, Enough, HighRisk, Investments, Matters, Smart, Wealth