Aug. 12 (Bloomberg) -- JPMorgan Chase & Co. had its biggest decline in six years after reporting a $1.5 billion loss on mortgage-backed assets in less than two months.

JPMorgan dropped $3.97, or 9.5 percent, to $37.92 at 4:02 p.m. in New York Stock Exchange composite trading. It was the steepest one-day decline since July 23, 2002, when the bank was accused of hiding Enron Corp. debt. The shares had slipped just 4 percent in the year through yesterday.

``This is as close to the perfect storm as the bank can get,'' Richard Bove, an analyst at Ladenburg Thalmann & Co., wrote in a note to investors. Bove today cut his 2008 earnings estimate for the bank to $2.23 a share from $2.46 and reduced his price target to $39 from $43. ``No company, no matter how well-managed, can avoid being impacted by weaknesses in its core business.''

Trading conditions for the second-biggest U.S. bank by market value ``have substantially deteriorated'' since July, and ``sharply widened'' spreads on mortgage-backed securities and loans caused losses, JPMorgan said in a regulatory filing late yesterday. Financial firms have reported more than $500 billion of losses and writedowns on debt securities since the subprime- mortgage market meltdown in 2007.

Writedowns

JPMorgan Chief Executive Officer Jamie Dimon oversaw more than $14 billion of writedowns, losses and credit provisions on mortgage-tainted assets through the second quarter, less than the $55 billion reported by Citigroup Inc., its bigger rival.

JPMorgan spokesman Brian Marchiony declined to comment on the Bove note. JPMorgan agreed to pay $2.2 billion in 2005 to resolve a lawsuit by Enron investors.

The bank held $16.3 billion of ``legacy leveraged loans,'' or unsold high-risk lending it underwrote, and unfunded commitments as of June 30, and $11.6 billion of commercial mortgage-backed securities, the filing showed.

JPMorgan wrote down the value of leveraged loans and mortgage-related assets by $1.1 billion in the second quarter, according to data compiled by Bloomberg.

The consumer provision for credit losses could increase ``substantially'' from a higher level of losses in retail financial services' $95 billion home equity loan portfolio, $14.8 billion in sub-prime mortgages, $47.2 billion prime mortgage loan portfolio and in the $155.4 billion credit card portfolio, JPMorgan said in the filing.

More Credit Weakness

``Management expects continued deterioration in credit trends for the consumer portfolios which will likely require additions to the consumer loan loss allowance during the remainder of 2008,'' the company said.

Sub-prime writedowns are expected to continue to rise ``significantly'' during the second half of this year, with ``deterioration'' expected to continue next year, JPMorgan said.

The company also disclosed that its customers hold $5 billion in auction-rate securities, including $3 billion held by retail investors. If the company is forced to bring the $3 billion in auction-rate securities onto its books, a step taken by other firms in recent weeks, JPMorgan may have to write down about $350 million in losses, Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone wrote in a note today. He has an ``in line'' rating on the shares.

JPMorgan expects the global economy ``to continue to be weak, for capital markets to remain under stress and for a continued decline in U.S. housing prices,'' the filing said. ``These factors have affected, and are likely to continue to adversely impact, the firm's credit losses, overall business volumes and earnings.''

`Wrong' on Mortgages

JPMorgan's second-quarter net income fell 53 percent to $2 billion on mortgage-related writedowns and costs from the takeover of Bear Stearns Cos. It marked down the value of loans promised to fund last year's buyouts by 20 cents on the dollar last quarter.

Dimon, 52, said in a statement that accompanied the earnings last month that while a weakening economy means financial markets will remain ``under stress,'' the New York-based company's capital position is strong. JPMorgan's decision in 2007 to expand in mortgages was ``wrong,'' he said.

Home prices in 20 U.S. metropolitan areas dropped 15.8 percent in May, the biggest decline since record-keeping began in 2001, according to the S&P Case-Shiller Home-Price Index.

Prices of high-risk, high-yield loans fell in early July to the lowest levels since April. The average actively traded loan fell to 89.32 cents on the dollar last month, compared with more than 92 cents in mid-June, according to Standard & Poor's LCD.

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net

Last Updated: August 12, 2008 16:56 EDT