JPMorgan struck by $1.5 billion writedown!

NEW YORK – August 12, 2008 - JPMorgan Chase provided evidence of more turbulence in financial markets, warning that stormy credit conditions had forced it to take a $1.5bn writedown on mortgage-backed assets in July.

The warning by JPMorgan will reinforce investors’ worries over the length and breadth of the financial crisis.

In a regulatory filing, JPMorgan said since the beginning of July, trading conditions in the mortgage market “had substantially deteriorated . . . causing the company to incur losses” of $1.5bn, excluding hedges.

Bankers said July was the worst month for mortgage-backed bonds since the beginning of the crisis, as a combination of cut-price sales and waning demand from large investors helped to depress prices.

JPMorgan declined to comment further. However, people close to the company said it had been forced to write down the value of its $33bn in mortgage-backed securities as prices continued to drop in July.

They said the writedowns were partly driven by Merrill Lynch’s decision to sell $6.7bn in toxic securities to Lone Star funds, the distressed debt investor, for just 22 cents on the dollar.

The move prompted a fall in the prices of similar securities, forcing JPMorgan to mark down its own assets.

Continuing troubles at Fannie Mae and Freddie Mac also put downward pressure on these types of assets. The two government-sponsored mortgage financiers have been less willing to support the market by buying mortgage-backed bonds.

JPMorgan’s move is likely to be followed by other banks, which are expected to mark down their portfolios to reflect the lower prices.

JPMorgan said Level 3 - or illiquid - assets on its balance sheet had risen by $44.5bn in the three months to June after buying $41.5bn in hard-to-value loans, securities and derivatives from Bear Stearns.