nakedcapitalism.com/2011/04/ … n-hit.html
Monday, April 11, 2011
Louise Story at the NYT has this:
In the summer of 2007, as the first tremors of the coming financial crisis were being felt on Wall Street, top executives of JPMorgan Chase were raising red flags about a troubled investment vehicle called Sigma, which was based in London. But the bank chose not to move out $500 million in client assets that it had put into Sigma two months earlier.
Sigma collapsed a year later. Now, new documents unsealed late last month as part of a lawsuit by bank clients against JPMorgan show for the first time just how high the warnings about Sigma went — all the way to the office of the bank’s chief executive, Jamie Dimon.
Industry group SIFMA thinks the lawsuit has little merit:
The Securities Industry and Financial Markets Association, a prominent trade group, wrote a brief in support of JPMorgan last month saying that the pension funds that are suing had an “unprecedented and novel theory” that “contradicts decades of Congressional and regulatory guidance.”
Where was the fiduciary duty? And where was the Chinese Wall? From a legal standpoint SIFMA may well turn out to be absolutely right. Reputationally, things aren’t so great, though. Follow the money:
I wonder how many sigmas this one is…zerohedge.com/news/jpm-crash … ket-losses
Out of nowehere, JPM announced 40 minutes ago that it would hold an unscheduled 5pm call to coincide with the release of its 10-Q. Rumors were swirling as to why. The reason is as follows:
JPMORGAN SAYS CIO UNIT HAS SIGNIFICANT MARK-TO-MARKET LOSSES - "Fortress balance sheet" at least until Bruno Iskil gets done with it.
JPMORGAN SAYS LOSSES ARE IN SYNTHETIC CREDIT PORTFOLIO - but, but, net is NEVER, EVER Gross.
JPM WOULD NEED $971M ADDED COLLATERAL IF RATINGS CUT ONE-NOTCH
JPM WOULD NEED $1.7B ADDED COLLATERAL IF RATINGS CUT 2 NOTCHES - how about three notches?
JPMORGAN: MAY HOLD SOME SYNTHETIC CREDIT POSITIONS LONG TERM - "Level 3 CDS FTW"
"As of March 31, 2012, the value of CIO's total AFS securities portfolio exceeded its cost by approximately $8 billion"
As a reminder, the CIO unit is where Bruno Iksil was making $200 billion-sized bets. Basically JPM has suffered massive losses at its CIO group most likely due to its IG/HY positions held by Iksil.
Also: zerohedge.com/news/bruno-iksil-dunzo zerohedge.com/news/worlds-la … -went-bust
Some background from a month ago:bloomberg.com/news/2012-04-0 … -bets.html
Some cowwobowation:bloomberg.com/news/2012-05-1 … -loss.html
Jamie’s the best of them by a long shot.
The whale has beached
Jamie Dimon Misrepresented “London Whale” Risks, Admits to $2+ Billion Loss Plus Risk Management Black Eye
Bloomberg reported on the story in early April, noting that Iskil’s postions were so large that he was driving prices. This is generally a sign of a basic failure in risk management. You never want to take a bet too large in a market if you might want or need to exit quickly, and highly leveraged firms in general are not in a great position to ride out adverse price moves, even if they believe the trade will work out in the end. This same mistake felled LTCM and Amaranth. Even more telling, Dimon made clear this trade was not a hot idea to begin with, repeatedly calling it poorly conceived, poorly executed, and not sufficiently monitored (update: Felix Salmon says he believe the trade was a cash-basis trade).
So much for JP Morgan’s vaunted risk acumen. As we’ve noted, one of the big reasons it wasn’t as badly hit in the crisis was that it took big CDS losses in 2005 on the Delphi bankruptcy (yes this is a rumor, but it is as pretty widespread rumor, and the sources are credible). The bank got cautious just as the subprime market was entering its toxic phase. So JP Morgan may have dodged the bullet at least in part by getting a wake-up call earlier than its peers.
But other issues seems even more important. First is that Dimon consistently misrepresented the seriousness of the exposures as soon as the press was onto it. Both Bloomberg and the Wall Street Journal were digging, and Dimon was dismissive, calling the concerns a “tempest in a teapot”. JPM shares are down over 5% in aftermarket trading. The CEO misled investors, but no one seems to care much about niceties like accurate and timely disclosure these days. This is the disclosure in the first quarter 10Q:
nakedcapitalism.com/2012/05/ … k-eye.html
From a cursory reading of the numerous articles cluttering the blogosophere about this, I can only conclude the lesson is, once again, that banks should not be involved in transactions that cannot be explained to their chief executives - and Dimon is not a stupid man - in a 15 minute briefing.
From a cursory reading of the numerous articles cluttering the blogosophere about this, I can only conclude the lesson is, once again, that banks should not be involved in transactions that cannot be explained to their chief executives - and Dimon is not a stupid man - in a 15 minute briefing.
I’ve no doubt Dimon understands the instruments and strategies involved.
Could it be a case of JP knowingly taking a position that simply went against them ?
jmc
May 11, 2012, 11:48am
8
It looks like a prop trading desk play that was masquerading as a hedge. Due to its configuration (for legal reasons) they were boxed in and had limited options when then needed to rejig it when some of the numbers went against them. The rejig involved fairly illiquid instruments which tipped their hand to the other players who piled in for the kill. Also seemed that the risk models were wrong regarding downside. VaR strikes again. Potential pricing model losses of tens of millions turned into real losses of billions. By the time they realized just how big a hole the London desk had dug it was too late. Guess who’s not getting their bonus this year. It seems the Greeks did not know their greeks…
More details here…
dealbreaker.com/2012/05/whale-sushi-on-the-menu-at-jpmorgan-executive-lunchroom-for-next-few-months/
and here…
zerohedge.com/news/jpm-staring-another-3-billion-loss
Er, right - chicken asked which fox they like the best…
jmc
May 14, 2012, 3:45pm
13
Nice summary…
dealbook.nytimes.com/2012/05/11/in-jpmorgan-chase-trading-bet-its-confidence-yields-to-loss/?smid=tw-nytimesdealbook&seid=auto
The zinger…
Interesting numbers…
In 2009, the unit’s net income peaked at $3.7 billion, up from $1.5 billion the previous year. The jump in earnings in 2009 resulted from large purchases of mortgage-backed securities guaranteed by the United States government, according to a company filing. Net income for last year totaled $411 million.
So CIO not a minor unit. Which is why Dimon knew all about its ops even before its VaR blew out beyond the rest of the bank.
Sounds like the classic story of a position growing so large in a small market that any changes move the market. Which invalidates the first principal of all the math their pricing and risk models were based on. First, lets assume a perfectly efficient market… Once that happens things can go non linear very quickly with little notice.
When the other players worked out what was going on then it became a game of deepest pockets. Which JPM would have won if it had not been for all the pesky regulators. So oddly enough, a story of regulation working. Those who tried to bend the rules are out of a job. For the moment. And those who looked the other way while the setup happened are in for a very uncomfortable next few years. The investor class action law suits should be very interesting.
Jamie Dimon’s plan to enfeeble the Dodd-Frank reforms, specifically the Volcker rule, has blown up spectacularly. Apparently JPM was so confident that their interpretation of the hedging exemption would prevail, that they got ahead of themselves and operated as if this loophople were in effect. But then things went horribly wrong for them. And the losses are even more damaging since the blowup is the result of activity the law was meant to curtail. Double trouble now for JPM, since it’s inconceivable that the hedging exemption they designed will make it into the final rulemaking. If it does survive, then we’ve got bigger issues with our regulators than we imagined.
In today’s New York Times, James Wyatt provides an under the radar view of how laws are gutted when the regulators involved in rule-making are heavily lobbied by the regulated. One objective of Occupy the SEC was to inject a non industry perspective in this process as a counterweight to the overwhelming industry influence. By looking for loopholes we intended to shed light on the self-serving interests of the bankers and the vulnerability of the regulators to concerted industry pressure. Wyatt describes the lobbying efforts:
Several visits over months by the bank’s well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking.
“JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging,” said a former Treasury official who was present during the Dodd-Frank debates.
Portfolio hedging is at the heart of the London Whale debacle.
The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.
Portfolio hedging “is a license to do pretty much anything,” Mr. Levin said. He and Senator Jeff Merkley, an Oregon Democrat who worked on the law with Mr.Levin, sent a letter to regulators in February, making clear that hedging on that scale was not their intention.
“There is no statutory basis to support the proposed portfolio hedging language,” they wrote, “nor is there anything in the legislative history to suggest that it should be allowed.”
nakedcapitalism.com/2012/05/ … ou-so.html
How JPMorgan’s storm in a teapot grew: ft.com/cms/s/0/6197eb2a-9f64 … abdc0.html #FT
JPMorgan fiasco exposes the myth of the imperial CEO: ft.com/cms/s/0/e8ea4a22-9dd0 … abdc0.html #FT
Obama yet again shows how he is a Wall St sellout
The dog that didn’t bark this week, let alone bite, was the President’s response to JP Morgan Chase’s bombshell admission of losing more than $2 billion in risky derivative trades that should never have been made.
“JP Morgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion,” the President said on the television show “The View,” which aired Tuesday, suggesting that a weaker bank might not have survived.
That was it.
Not a word about Jamie Dimon’s tireless campaign to eviscerate the Dodd-Frank financial reform bill; his loud and repeated charge that the Street’s near meltdown in 2008 didn’t warrant more financial regulation; his leadership of Wall Street’s brazen lobbying campaign to delay the Volcker Rule under Dodd-Frank, which is still delayed; and his efforts to make that rule meaningless by widening a loophole allowing banks to use commercial deposits to “hedge” (that is, make offsetting bets) their derivative trades.
Nor any mention Dimon’s outrageous flaunting of Dodd-Frank and of the Volcker Rule by setting up a special division in the bank to make huge (and hugely profitable, when the bets paid off) derivative trades disguised as hedges.
Nor Dimon’s dual role as both chairman and CEO of JPMorgan (frowned on my experts in corporate governance) for which he collected a whopping $23 million this year, and $23 million in 2010 and 2011 in addition to a $17 million bonus.
Even if Obama didn’t want to criticize Dimon, at the very least he could have used the occasion to come out squarely in favor of tougher financial regulation. It’s the perfect time for him to call for resurrecting the Glass-Steagall Act, of which the Volcker Rule – with its giant loophole for hedges — is a pale and inadequate substitute.
And for breaking up the biggest banks and setting a cap on their size, as the Dallas branch of the Federal Reserve recommended several weeks ago.
robertreich.org/post/23172076059
woger
May 17, 2012, 1:23pm
17
That’s socialism for you!
jmc
May 17, 2012, 5:07pm
18
best blow by blow of the train wreck so far for those who know their greeks and their kurtosis…
zerohedge.com/news/irony-101-or-how-fed-blew-jpmorgans-hedge-22-tweets
crushed by delta hedging it seems…
Another text book case of “when pricing models blow up”…
and
The problem looks less with the model equations breaking down than with the assumptions that went into finessing the numerical solutions of the equations no longer being valid. Very easy to overlook until its far too late to recover. So it soon became garbage in - garbage out. A bit like with the flight avionics software on the flight AF477 Airbus.
jmc:
best blow by blow of the train wreck so far for those who know their greeks and their kurtosis…
its far too late to recover. So it soon became garbage in - garbage out. A bit like with the flight avionics software on the flight AF477 Airbus.
But surely you should be going out to bat for JP Morgan and James Dimon, the Great Defender of our Godly pristine capitalst system against the hordes of ne’er-do-well Occupy hippies and all that?
Anyway, a typically fawning profile from Fortune in 2006:
features.blogs.fortune.cnn.com/2 … -jpmorgan/
You don’t have to read too closely between the lines to suss that the guy is a nasty bully.
