Whaledemort’s Soul, Portfolio Broken Up And Hidden In JPMorgan Investment Bank

Who wins the call-the-Whale-close? The headline number is a $4.4 billion loss this quarter but that is lower than it could have been because those losses propagated backwards through time:

JPMorgan Chase & Co. (NYSE: JPM) today reported that it will restate its previously-filed interim financial statements for the first quarter of 2012. The restatement will have no effect on total earnings or revenues for the company year-to-date.*

The restatement announced today will reduce the firm’s previously-reported net income for the 2012 first quarter by $459 million. The restatement relates to valuations of certain positions in the synthetic credit portfolio in the firm’s Chief Investment Office (CIO).

The total loss in the first quarter is now $1,378mm for Q1 (footnote 3 of page 14 here); add $4,409mm for Q2 (page 3 here) and you get a total final official loss of $5,787mm. So far.**

The restatement is fascinating, and Dimon is proud of it: “This is what the SEC chairwoman herself would have done if she had seen all the same facts at the same time.” Okay! But she probably wouldn’t have done this:

The restatement results from information that has recently come to the Firm’s attention in connection with management’s internal review of activities related to CIO’s synthetic credit portfolio. Under Firm policy, the positions in the portfolio are to be marked at fair value, based on the traders’ reasonable judgment as to the prices at which transactions could occur. As an independent check on those marks, the CIO’s valuation control group (“VCG”), a finance function within CIO, verifies that the traders’ marks are within pre-established price testing thresholds around external “mid-market” benchmarks and, if not, adjusts trader marks outside the relevant threshold. The thresholds consider market bid/offer spreads and are intended to establish a range of reasonable fair value estimates for each relevant position. At March 31, 2012, the trader marks, subject to the VCG verification process, formed the basis for preparing the Firm’s reported first quarter results.

However, the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the Firm is no longer confident that the trader marks used to prepare the Firm’s reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end.

Specifically “Emails, voice tapes and other documents, supplemented by interviews, suggestive of trader intent not to mark positions where they believed they could execute.” Where have we heard that before?

The hits really keep on coming for Jamie Dimon. The Whale losses, even at $5.8bn, aren’t that big: JPMorgan still reported net income of $5bn this quarter (and $4.9bn in restated last quarter), and the $5.8bn is 0.25% of assets and 3.9% of tier 1 capital. And losing money isn’t a crime, or even all that uncommon, so he could take a certain amount of high ground talking to Congress. You can read more about what Whale & friends did here, in Mike Cavanagh’s shame-the-CIO presentation; it’s kind of what everyone thought and not great but also not outrageously outrageous. And sure there had been rumors that the CIO was mis-marking its portfolio, which is … maybe criminal-ish … but sounded sort of like garden-variety trader optimism and not that big a deal.

But to then have to announce that the CIO was doing exactly that – and that they were doing it with the intent of hiding losses and making themselves look better – and to the tune of hundreds of millions of dollars – and that there were emails about it – probably hurts more than the money. And it is just terrible to have to announce that right smack in the middle of Liborgate, when there is a lot of press and regulator and Congressional attention to banks making themselves look better by reporting numbers that, although arguably within a reasonable range, were not executable. That maybe was garden-variety mild misbehavior, both at JPM CIO and in Libor – but that does not look like a great defense any more.

In any case, this seems to be the end of the line for the Whale and his famous trade – not so much because JPMorgan is out of the trade, but because it’s moved it somewhere less visible:

“Since the end of the first quarter, we have significantly reduced the total synthetic credit risk in CIO – whether measured by notional amounts, stress testing or other statistical methods. The reduction in risk has brought the portfolio to a scale that allowed us to transfer substantially all remaining synthetic credit positions to the Investment Bank. The Investment Bank has the expertise, capacity, trading platforms and market franchise to effectively manage these positions and maximize economic value going forward. As a result of the transfer, the Investment Bank’s Value-at-Risk and Risk Weighted Assets will increase, but we believe they will come down over time.”

The transfer is around $30bn of risk-weighted assets, around $40mm of VaR, around $7mm of CS01, and “Extreme simulated scenarios indicate potential losses between $800mm-$1.6B.” What’s left seems to be hedged tranches of credit indices. And, I’d guess, being very conservatively marked.

JPMorgan earnings stuff [JPM]
Earnings 8-K [EDGAR]
Restatement 8-K [EDGAR]

* Isn’t that sort of a jarring thing to say btw? Like, “we discovered we lost an extra $459mm last quarter, but it’s okay, we would have lost it this quarter anyway.”

** Updated with exact numbers etc.

(hidden for your protection)
Show all comments

77 Responses to “Whaledemort’s Soul, Portfolio Broken Up And Hidden In JPMorgan Investment Bank”

  1. fitting in says:

    well done matt. good morning.

  2. Cheating Bastards says:

    Traders are all the same.

    • Honest Trader says:

      No they aren't! We had 4 traders show up at a recent "Integrity Meets Finance" party at Mooley's.

  3. Guest says:

    Wait so it 5.8 what we are using as the winning number?

  4. Dumbledor Capital says:


  5. Guest says:

    I wonder how you feel coming to work in the morning know that, "i lost my boss 5.8 billion" i don't think i would be worried, that's a fucking accomplishment.

    Also wondering what his co-workers think of him…

    • Kweku says:

      Well you know what they say; if you lose your boss $5.8 million, you have a problem. If you lose your boss $5.8 billion, you….. still have a problem, but also a book deal!

    • Gas Trading Pro says:

      If they held on to the position for another 5 or 6 years it would have ben profitable. Management made the trader take a loss!!

    • Guest says:

      She probably doesn't feel TOO bad considering she's worth millions.

  6. Guest says:

    [youtube Tym0MObFpTI&feature=related youtube]

  7. .Bo says:

    Matt math > Doug Braunstein


  8. guest says:

    I will solve this mismarking problem in one step, make the penalties for mismarking trading books as punitive as someone walking into a bank and robbing it, except make the penalties punishable across every layer of management that missed the traders mismarked losses. I'm sure Bruno, Jamie and the rest of the crew would have been a lot more in tune with risk management if several years of ass pounding in the joint were the punishment rather than handing back inflated bonuses.


  9. Nervous Chart Fan says:

    Matt, that CIO task force deck sure could have used more charts, don't you think?

  10. Gen Tso Chick says:

    If we claim responsibility for the loss does that count as deal flow on the league table for us?

    UBS Desperate Measures MD

  11. Guest says:

    Nick Saban's daughter ate my Fudgie the Whale!

  12. Losing $4.4 billion looks like nothing with JPM profits being down so LITTLE!

    Good times are back boys!

    • Smelling Good Today! says:

      Where's my billion dollar bonus? JPM apologists say the loss nothing and insignificant. If they don't value the billions in loss why not just give it to people who do value the money?

  13. Peter says:

    "And losing money isn’t a crime"

    The invite to Congress wasn't about 'losing money.' It was about your penniless cousin sleeping on the couch, eating your Cocopuffs then spending all day playing the horses.

    • Kouwe's Cousin says:

      We haven't talked about Kouwe for quite a while here, what makes you bring him up?

    • Done Deal! says:

      If losing money was a crime you'd need a lot more jails in Houston, Dallas, Tulsa and Oklahoma City.

  14. HHFM says:

    I won! Got my info from Shia.

  15. UBS MD says:

    "And losing money isn’t a crime, or even all that uncommon"

    Hell yeah!

  16. FKApmco says:

    Gross loss was 5787; net revs was 3667. I bid 5385 and 3385 which makes me the closest on both.
    Bath Toy pls.

  17. Richy says:

    Dimon: There will come a time when your Summer Analyst must be told something. But you must wait until Whale is at his most vulnerable.

    Severus Snape: Must be told what?

    Dimon: On the night the London Whale went to Godric's Hollow to make a trade, and the SA cast his application online between them, the curse rebounded. When that happened, a part of the Whales soul latched itself onto the only living thing it could find. The intern himself. There was a reason he could speak with clients. There was a reason he could look into London Whales mind. A part of the London Whale lives inside him.

    Severus Snape: So when the time comes, the boy must die?

    Dimon: Yes. Yes. He must die

  18. Guestay says:

    "The Whale losses, even at $5.8bn, aren’t that big"

    Ah to be 30 and have worked at Goldman…

  19. Guest says:

    JP Morgan trading loss > UBS trading loss !

    – UBS employee who is really happy that after all a lot of other bulge bracket banks fuck up too

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