JPMorgan

JPMorgan Chase Chief Executive Jamie Dimon said his company has lost up to $10 billion as a result of the government asking him to buy teetering Wall Street firm Bear Stearns during the financial crisis. “Someone said the Fed did us a favor to finance some of this or something like that. No no no. We did them a favor,” Dimon said, speaking at a Council on Foreign Relations event. “I’m going to say we’ve lost $5 billion to $10 billion on various things related to Bear Stearns now. And yes, I put it in the unfair category,” the CEO added. [CNBC]

Dimon recalls that when he e-mailed his senior executives, back in 2010, first proposing the JPMorgan Chase bus tour, which is designed to demonstrate to clients, employees, and important people around the country that the bank is a force for good in the world. But, as in almost everything related to JPMorgan, Dimon prevailed. “That’s bullshit. We have to live our lives and do the right thing,” he told them…At stop after stop, the executives emerged from their bus cocoon into what they called “the Tunnel of Love,” where employees surrounded them for hugs, fist pumps, and high fives. [VF]

You’ve all peered into Ina Drew’s soul by now, right? My basic reaction was, “she kicks it old school.” This is obvious from the way that she stayed in Short Hills after getting rich, instead of decamping to, like, the moon, I guess? More telling, perhaps, is the fact that she seems to have been present at the creation of the idea of buying and selling financial instruments to hedge a bank’s credit risk:

By the mid-1980s, Drew was working directly under an economist named Petros K. Sabatacakis, the head of Chemical Bank’s global treasury department. Among the department’s tasks was managing interest-rate risk … Still, the group was considered a sleepy backwater until Sabatacakis turned their attention a few years later to banking’s other major risk: credit default. The bank was most vulnerable to its lenders1 defaulting in a recession; in a recession, the Federal Reserve generally lowers interest rates to increase borrowing and spending. Sabatacakis determined they should continue to buy those securities whose value would rise in a recessionary environment. “It was a trader’s mentality,” says Glenn Havlicek, a trader who worked under Drew for 22 years. “It may seem elemental, but at the time, the idea of mixing a trading solution and a credit-crisis solution — it was in its awkward infancy.”

That was an awkward infancy! Basically you notice that there’s a correlation between (1) spreads widening and (2) rates tightening, so you get long rate product to hedge your spread product? That’s a pretty blunt instrument: Read more »

So, subprime mortgage-backed securities. Here’s a schematic:

  • Banks packaged subprime mortgages into bonds and sold them to people.
  • Something.
  • The bonds were bad and the people lost money.

What’s the something? There are two main theories. Theory 1 says that everyone knew at some lizard-brain level that it was a bad idea to give lots of money to poor unemployed people with low credit scores to buy overpriced houses, but figured it would work out fine if house prices kept going up. This worked until it didn’t; when house prices went down, badness ensued.

Theory 2 says that, while mortgage originators and securitizers knew that they were giving mortgages to people who had no chance of paying them back, the buyers of those mortgages had no idea: they thought that the originators were holding them to rigorous underwriting standards, where “rigorous” is read to mean “other than requiring a job, or an income, or assets, or a credit score.” When that turned out to be false, badness ensued.

Theory 1 has the benefit of probably being right.1 Theory 2 is superior on every other metric. For one thing, it fits well with deep cultural desires to find villains for the subprime crisis, and punish them. For another, it better fits the explicit facts. No subprime offering document actually said “these guys are all just terrible reprobates and the only way you’ll get your money back is if they can find a greater fool to buy their overpriced house when their rate resets.” But there’s no shortage of internal emails that say – well:

In connection with the Bear Stearns Second Lien Trust 2007-1 (“BSSLT 2007-1”) securitization, for example, one Bear Stearns executive asked whether the securitization was a “going out of business sale” and expressed a desire to “close this dog.” In another internal email, the SACO 2006-8 securitization was referred to as a “SACK OF SHIT”2 and a “shit breather.”

Thanks Eric Schneiderman! Read more »

  • 21 Sep 2012 at 1:29 PM

The CDX And The Whale

The OCC report on bank derivative activities is rarely what you would call a laugh riot but I enjoyed that the 2Q2012 one released today gives the London Whale a belated sad trombone:

Commercial banks and savings associations reported trading revenue of $2.0 billion in the second quarter of 2012, 69 percent lower than the first quarter of 2012, and 73 percent lower than in the second quarter of 2011, the Office of the Comptroller of the Currency reported today in the OCC’s Quarterly Report on Bank Trading and Derivatives Activities.

“Trading revenues were weak in the second quarter,” said Martin Pfinsgraff, Deputy Comptroller for Credit and Market Risk. “While both normal seasonal weakness and reduced client demand played a role, it was clearly the highly-publicized losses at JPMorgan Chase that caused the sharp drop in trading revenues.” Mr. Pfinsgraff noted that JPMorgan Chase reported a $3.7 billion loss from credit trading activities, causing the bank to report an aggregate $420 million trading loss for the quarter.

How big a deal Whaledemort is depends on your denominator: compared to JPMorgan’s assets, or even its revenues, he’s a drop in the ocean, but his misadventures in credit derivatives did wipe out two-thirds of all derivative trading revenues among all US banks. And he’s a good enough excuse to talk about a random assortment of other credit-derivative-trading things from the last few days. First is a neat Bloomberg article (appears to be terminal-only now) about CDX NA HY 19: Read more »

Jamie Dimon, the outspoken chief executive of JPMorgan Chase, sat down on Tuesday for what banking analysts called a “fireside chat” during the Barclays 2012 Global Financial Services Conference. Known for his hands-on management style and confident swagger, Mr. Dimon has been navigating the fallout from a rare misstep in his career after JPMorgan announced a multibillion-dollar loss on a complex credit bet at its chief investment office unit. During a question-and-answer session with Jason Goldberg, a Barclays analyst, Mr. Dimon responded to questions about things like his stance on the mounting turmoil in Europe and regulatory changes, in particular the Volcker Rule, which restricts banks from trading with their own money. Mr. Goldberg started by asking Mr. Dimon about the rationale behind shaking up the upper echelons of JPMorgan’s executive suite in July. “It had nothing to do with the chief investment office,” Mr. Dimon said. He added that “there is nothing mystical, folks,” because the moves enabled greater cross-selling. “Cross-selling is a big deal, and we do an exceptionally good job,” he said…Tackling the issue of whether the big banks should be broken up, Mr. Goldberg asked Mr. Dimon about recent calls to break up the major banks. “There are huge benefits to size,” Mr. Dimon said. He noted that JPMorgan’s size allowed it to be “a port in the storm” during the market turmoil of 2008. “Big banks have a function in society.” The United States, he added, has the “best, widest, deepest and most transparent capital markets in the world.” Cautioning against needless reform, Mr. Dimon said, “Let’s make sure we keep that before we do a bunch of stupid stuff that destroys that.“ [Dealbook]

A fourth London-based JPMorgan Chase trader is under scrutiny in the investigation by U.S. authorities into the bank’s nearly $6 billion trading loss, according to sources familiar with the situation. Julien Grout, a trader who joined JPMorgan Chase in 2009, is drawing attention because he worked in the bank’s Chief Investment Office and reported to Bruno Iksil, the French credit trader who is a central figure in the federal probe, said the two sources. U.S. authorities are trying to determine whether traders in the bank’s London office, including Iksil, took steps to try and hide some of the losses the bank was incurring on a series of complex derivatives trades. In the trading community in London, Iksil became known as the London Whale because of the large positions he and his colleagues were taking on. Grout, who is also French, is still working for JPMorgan, according to a bank spokeswoman. [Reuters]