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JPMorgan’s Regulators Plan To Ask Some Pointed Questions About … Sorry, Was It The London Quail? Something Like That.By Matt Levine
I didn’t really understand this morning’s Journal headline – “Regulatory ‘Whale’ Hunt Advances” – since the whale in question, JPMorgan’s Bruno Iksil, has been caught, harpooned, killed, flensed, picked clean by sharks, and his skeleton mounted in the American Museum of Unfortunate Trades. So the OCC’s hunt is … somewhat late no?
The Office of the Comptroller of the Currency, led by Comptroller Thomas Curry, is preparing to take a formal action demanding that J.P. Morgan remedy the lapses in risk controls that allowed a small group of London-based traders to rack up losses of more than $6 billion this year, according to people familiar with the company’s discussions with regulators.
The OCC, the primary regulator for J.P. Morgan’s deposit-taking bank, isn’t expected to levy a fine, at least initially.
I submit to you that:
- JPMorgan has at the very least talked a good game about remedying the lapses in risk controls that led to the Whale’s losses, insofar as it’s wound down the trade, fired everyone involved, appointed new risk managers, changed the models, moved the relevant portfolio out of the division that used to house it, and otherwise done everything in its power to make its chief investment office a no-cetaceans zone, and
- If the OCC disagrees, and thinks that JPMorgan hasn’t taken commercially reasonable risk-management steps to remedy the lapses that led it whaleward, then there may be bigger problems than can be fixed by a notice saying “oh hey you might want to look into that.”
Anyway. Yesterday the OCC also released its Semiannual Risk Perspective for Fall 2012; December 20 is technically fall but the document has data through June 30 so that too seems a bit behind the times. The OCC: your time-shifted banking overseer.
And bank soundness is, or was in June, also improving, across various metrics including simple leverage:
But future storms are, or were in June, a-brewin’ on the horizon, as banks are starting to get more reckless with average highly levered loans2 now at 6.3x debt-to-EBITDA, high-yield issuance surging, leveraged loan and bond spreads tightening, covenant-lite exploding, and underwriting standards slackening:3
That … that seems like good news too? As credit gets better and interest rates stay low, and as banks’ capitalizations improve and provide a bigger cushion against losses, aren’t they supposed to go looking for riskier credits to improve profitability and put all those deposits to good use? Reckless lending, ideally though not always combined with robust capitalization and liquidity, is how you grow the economy, is it not? It’s also I guess how you get the next crash, but that’s, like, in the future. It’s possible that there is a better system than this but I don’t want to hear about it.
Banks reported $6.3 billion in trading revenues through June 30, 2012, 48 percent lower than the same six month period in 2011 (see figure 14). The weak performance relative to 2011 was entirely a second quarter event, as trading revenues were similar in the first quarter of both years. Trading revenues in the second quarter of 2012 were sharply lower (78 percent) than in 2011, falling from $4.8 billion to $1.3 billion. The poor second quarter trading performance can be attributed to a $4.2 billion loss in credit trading, reflecting the well-publicized events at JPMorgan Chase, N.A. Beyond credit trading losses, however, trading revenues in the second quarter were further suppressed by weak client demand, a result of heightened uncertainty associated with accelerating concerns about global economic growth, the U.S. “fiscal cliff,” and the European sovereign debt crisis.
- 1H 2011: $4.8bn
- 1H 2012: $1.3bn, with $4.2bn Whale loss
- 1H 2012 pro forma for dewhaling: $5.5bn
- “… trading revenues were similar in the first quarter of both years …”
- “… trading revenues in the second quarter [of 2012] were further suppressed by weak client demand [and stuff] …”
By my math, those revenues were about $700mm less suppressed than they were in 2011.