You might not remember this but there’s a bank called JPMorgan and that bank invests its excess cash in a portfolio of available-for-sale securities and a year ago this week it announced that a certain cetacean had lost $5.787 billion hedging those securities. Man, that pissed people off. There was a hearing and everything. Good times.
Bank of America Corp’s balance sheet suffered from rising bond yields in the second quarter, suggesting that the second-largest U.S. bank may be more exposed to interest-rate risk than some of its major rivals. … Bank of America appears to have used mortgage bonds in an investment portfolio to bet yields would stay stable and relatively low, say analysts who studied the size and composition of its holdings.
It lost that bet. U.S. bond yields surged after Federal Reserve Chairman Ben Bernanke said the bank would taper its latest bond buying programs. Bank of America booked some $5.73 billion of paper losses from these securities in the quarter, and still held about $170 billion as of June 30.
Those losses and others were in a portfolio, known as the “available-for-sale” book, which affects a bank’s balance sheet but does not affect earnings.
Are you not tickled by the coincidence? BofA’s investing-excess-cash-in-securities function – call it their “chief investment office,” though they don’t – lost $4.2 billion this quarter, versus JPMorgan’s CIO’s $4.4bn loss in 2Q 2012. Its particular investment in agency bonds seems to have lost it $5,728 million,1 ~1% away from JPMorgan’s $5,787 loss in its whale-managed synthetic credit portfolio. BofA’s agency AFS portfolio was around $170 billion; JPMorgan’s whale trade at its peak was a something like $158 billion notional.2 I look forward to Bank of America’s hearings, and more importantly to the cute animal name that will be spawned by this scandal.
No, I’m kidding, obviously nobody gives a shit.
Is it not fun to ponder why? Like: banks have vast pots of available-for-sale securities, which they manage with an eye toward “asset and liability management (ALM) and other strategic activities.”3 You can’t do that without some sort of broad macro view: if you think rates are going up, you reduce duration; if you think they’re going down, you increase it, etc. If you think credit will tighten, you push more of your AFS portfolio into credit; if you think it will widen, you reduce your credit exposure or buy some protection. If you do that last part very ineptly people start calling you a whale.
Now of course there are differences. The accounting is different, for one thing: the London Whale’s losses were in mark-to-market trades and flowed through net income; the Charlotte Manatee’s were in the available-for-sale portfolio itself and so flow through Other Comprehensive Income. If you’re gonna lose money that’s the place to do it, since it sort of doesn’t count, though now it does count for capital purposes.
Also that accounting difference reflects a real thing, which is that the London Whale’s losses were swiftly realized – some of his trades were pretty short-dated, and the rest he had to cough up pretty quick when Jamie Dimon got wind of what he was doing4 – so JPMorgan really was left with $5.8 billion less money when he got done with them, though actually it ended the first half of 2012 with $9.9 billion more money than it started, since other people at JPMorgan were making money as the Whale was losing it. BofA’s AFS losses are unrealized and you never know, rates could go right back down, perhaps this market move against them is just a meaningless blip. Or perhaps these securities are worth what the market thinks they’re worth, viz. $5.7bn less than they were worth last quarter, and so BofA is poorer by that amount.
Another difference is just, like, you’re a bank, you’re supposed to buy agency bonds, and you’re supposed to lose billions of dollars on your bonds when interest rates go up, whatever. Everyone’s doing it. Even Wells Fargo! Good old conservative Wells Fargo. JPMorgan, meanwhile, did its money-losing with eeeeeeeeeeevil gambly gambly derivatives, which are bad. And it found a creative way to lose money on credit when no one else was, which is not a good look.
Still it feels a little weird? Like: JPMorgan bet on credit, or whatever the Whale thing was, and that bet moved against them by $5.8 billion, and everyone freaked out. Bank of America bet on rates, and that bet moved against them by $5.7 billion, and, y’know, what else could they do? A moral you might draw here is: banking is hard!5 You gotta do something, you gotta position yourself somehow, every trade takes a view, and sometimes those trades will move against you. The trick, it seems, is to make sure that your losses are on simple, conventional, and broadly popular trades. Making them small is less important.
Analysis: Bank of America’s interest-rate exposure may be worse than rivals’ [Reuters]
1. Reuters said $5.73bn. I think you can reconstruct that from the supp:
BAC’s agency AFS securities had $2,852mm more MTM losses, and $2,876mm less MTM gain, at the end of Q2 compared to the end of Q1. That’s just agencies; there’s another $500mm swing in agency CMOs, making the “real” MTM loss on agency paper this quarter well over $6 billion. Other contrary changes in other portfolios make it so that BAC’s “Net change in available-for-sale debt and marketable equity securities” totals only ($4,233) for the quarter, and total OCI is ($4,221).
2. Though of course JPMorgan’s AFS book, at $375-ish billion, was much bigger.
3. BAC’s words:
Debt securities purchased for longer term investment purposes, as part of asset and liability management (ALM) and other strategic activities are generally reported at fair value as available-for-sale (AFS) securities with net unrealized gains and losses included in accumulated OCI.
4. I mean, the second time. After the teacup thing.
5. Obviously this post is mostly about “bringing back Glass-Steagall is kinda silly.”