• 12 Oct 2012 at 11:18 AM
  • Banks

JPMorgan CFO Handsome

JPMorgan did its third-quarter earnings call this morning, and even though the London Whale was a pretty minor presence on the call I was still going to throw up a picture of a whale here because (1) why stoke Jamie’s ego further and (2) who doesn’t like whales, but then the operator asked for closing remarks, and Jamie Dimon closed the call by saying “I’m just surprised no one mentioned how handsome Doug Braunstein looked in that article in the Wall Street Journal,”1 and, well, that happened, and we’re each going to have to deal with it in our own way, but in any case, Doug Braunstein, ladies and gentlemen.

I HAVE NOT FORSAKEN YOU WHALEDEMORT and we’ll talk about him in a bit when I can get my emotions in check but for now I guess we owe it to that handsome cherub to your left to talk about JPMorgan’s business a bit so let’s do that.

JPMorgan’s business: It is good! Records were set, expectations exceeded, the stock … um, opened down, but got better. (Then got worse again! I don’t know.) The other day I suggested that underwriting 30-year investment-grade bonds is sort of a bad business because you make 87.5bps now, but then your client is all set for 30 years, so it’s really only 3bps a year, which is not much compared to basically any other method of providing money to companies, except ironically actually lending them money (if they are high investment grade), which is just a pure loser. I more or less stand by that in a big-picture sense, but of course 30 years is well into IBGYBG territory and it feels great to make 87.5bps now, so now you’re happy. JPMorgan is I guess underwriting a lot of 30-year bonds; more to the point it’s underwriting a lot of 30-year mortgages.

A toy model you could have of the mortgage market is:

  • everyone who could possibly refinance a mortgage, ever, did that yesterday,
  • at the lowest interest rate in the history of all time both past and future;
  • JPMorgan made all those loans;
  • and JPMorgan sold them on to GSEs at a 200+ basis point margin instead of the more usual <100bps margin.2

That model would explain JPMorgan’s record production revenue in mortgage banking this quarter. It would also make you worry about future production revenue, since (1) everyone who could refinance has and (2) there is no incentive to re-refinance since rates will never be lower. So perhaps no one will ever get a mortage again.3

Jamie Dimon will soothe your worries, though. In the future you will not have huge servicing expenses for charge-offs, since everyone’s house will be worth more and they will have no problem paying for it at like a 3% interest rate. (Also, um, prepays?) In the future, you will not have huge expenses for getting sued by everyone over 2007 vintage mortgages, because 2007 will be more years ago than it is now. In the future your 200bps margins will dissipate, but you’ll make it up on volume, which loses me a bit because, remember, in this model, all the mortgages got done this year so where is that volume? But all in all, yes, I was soothed.

Mortgages were the topical highlight, but things seem to be good everywhere, especially on the capital front, where Jamie Dimon said roughly this4 during the Q&A:

The 8.4% Basel III estimate phases in everything we know about today, but doesn’t phase in our runoff over the next two years and our ability to build models to reduce RWAs. So it includes all the bad things, but none of the good things. We think we’d be at 9.5% with the runoff and building models to reduce RWAs.

I am pretty sure that I heard a record-scratch sound effect in the background when he said that but perhaps I was hallucinating, did you hear it too? Honestly, how can you not love Jamie Dimon? Let’s recap some highlights of his recent career:

  • Oversees huge opaque credit hedge position designed to optimize regulatory capital treatment.
  • Tweaks VaR model for that position to be all wrong, understating risk and thus probably overstating capital ratios.
  • Adjusts that position in dubious, risk-increasing ways, driven by capital treatment.
  • Loses a zillion dollars.
  • Trivializes that zillion-dollar loss.
  • Announces a material weakness in internal controls regarding, y’know, that.
  • Is all better.
  • Tweaks VaR model again to show less risk.
  • Gets on pugnacious earnings call in which he says he will ask regulators for additional stock buybacks in next year’s stress tests.
  • Brushes aside a question from a UBS analyst to the effect of “do you think your material weakness in internal controls will impact your ability to do buybacks?”
  • Says “our capital levels will be higher than you think because we will tweak our internal models to get them there.”

The name of the game in banking these days is tweaking your internal models to make your capital position look better in light of the particular flavor of dodgy crap you’ve decided to load up on. But, y’know, doing that quietly. Especially if your internal models have been subject to doubt in the recent past. But “quietly” isn’t how JPMorgan works; it’s not just the handsomest, but also the most honest bank in the world.

JPMorgan 3Q2012 Earnings Release
Presentation
Supplement
8-K

1. That article being the one speculating that Doug was getting kicked out of his CFO job. The one that Jamie didn’t exactly deny on this call.

2. That margin is basically (1) interest rate on loans JPM makes minus (2) interest rate on GSE RMBS that it sells. Why is it so big? Jamie Dimon’s view is that the high volume of refinancings “clogs up the system,” allowing for higher prices, which is either (1) a strange thing to say or else (2) a way to say “supply and demand,” which I guess has to be the answer, since it’s always the answer. Peter Eavis’s view is, like, BANKS ARE PROFIT GOUGING, which I think is also either strange or “supply and demand.” The mechanism of that supply and demand is somewhat opaque to me.

3. I know I won’t, ZING.

4. Paraphrase, sorry, I’ll update with the transcript if I remember.

21 comments (hidden for your protection)
Show all comments ↓

Comments (21)

  1. Posted by Fergus | October 12, 2012 at 1:24 PM

    This article had comments a few minutes ago. Really it did. Either that or the lunchtime scotches are hitting me harder than usual.

  2. Posted by Guest | October 12, 2012 at 1:43 PM

    It is spelled crotches not scotches.

  3. Posted by carlwesleyclark | October 12, 2012 at 2:42 PM

    < crawls out from under table at Captain's Ketch, dusts off suit, returns to trading desk >

  4. Posted by Me too | October 12, 2012 at 2:46 PM

    I had a comment disappear from this thread, and another yesterday. Neither was nasty or inappropriate. Is there something wrong with the system, Bess?

  5. Posted by Me too, again | October 12, 2012 at 2:49 PM

    On a related note, is it just me or is Matt becoming down right feisty?

  6. Posted by DB IT Hamster | October 12, 2012 at 2:50 PM

    You know, a few extra pellets now and again would go a long way toward keeping morale up back here in the wheels, and just maybe things might run a little more smoothly.

    Just sayin'

  7. Posted by A-Rod | October 12, 2012 at 2:59 PM

    Your comments were scratched at the last minute. Sucks, I know.

  8. Posted by Mongo | October 12, 2012 at 3:14 PM

    Mongo like headline! And candy.

  9. Posted by I wonder | October 12, 2012 at 3:20 PM
  10. Posted by D. Thomas | October 12, 2012 at 3:23 PM

    I don't believe you.

  11. Posted by I wonder part 2 | October 12, 2012 at 3:38 PM
  12. Posted by I wonder defeated | October 12, 2012 at 3:42 PM

    Stupid meme generator won't give me the jpg.

    So, envision the most interesting man in the world.

    Top caption: I rarely think about doing something for I.T.
    Bottom caption: but when I do, it involves Bonobos red skinny jeans.

  13. Posted by Penitent | October 12, 2012 at 3:46 PM

    May The Joke Briefer have mercy on your soul.

  14. Posted by Ta Da! | October 12, 2012 at 3:48 PM

    oy vay

  15. Posted by comments away! | October 12, 2012 at 8:27 PM

    At first I thought, not handsome, just cherubic; then I'm like, no, just cubic. And I just can't move beyond that point.

  16. Posted by mick | October 15, 2012 at 9:16 AM

    these sort of emotional tyrants on banks are not only surface level at best in its analysis but allow me to make lots of money 10 yrs from now in bank stocks. thx, keep it up!

  17. Posted by Uh, what? | October 15, 2012 at 10:18 AM

    . . . furiously searching for Google's "Gibberish-to-English" translator.

  18. Posted by itchy throat | November 17, 2012 at 10:22 PM

    I really loved what you had to say, and more than that, how you presented it

  19. Posted by sohbet | May 12, 2013 at 7:21 PM

    Chair, I will bail out strippers. The rest of the argument becomes irrelevant because the world will be a kinder happier place with more strippers. And, hence, the U.S. shall maintain world leadership in porn by preserving the efficiencies of a an

  20. Posted by العاب تلبيس بنات | July 15, 2013 at 9:04 AM

    العاب تلبيس بنات http://www.girls-gamess.com/

  21. Posted by Jam Tangan Kw | April 11, 2014 at 2:54 AM

    It is spelled crotches not scotches.