How should one read JPMorgan’s Whale Report? I suppose “not” is an acceptable answer; the Whale’s credit derivatives losses at JPMorgan’s Chief Investment Office are old news by now, though perhaps his bones point us to the future. One way to read it is as a depressing story about measurement. There were some people and whales, and there was a pot of stuff, and the people and whales sat around looking at the stuff and asking themselves, and each other, “what is up with that stuff?” The stuff was in some important ways unknowable: you could list what the stuff was, if you had a big enough piece of paper, but it was hard to get a handle on what it would do. But that was their job. And the way you normally get such a handle, at a bank, is with a number, or numbers, and so everyone grasped at a number.
The problems were (1) the numbers sort of sucked and (2) everyone used a different number. Here I drew you a picture:1
Everyone tried to understand the pool of stuff through one or two or three numbers, and everyone failed dismally through some combination of myopia and the fact that each of those numbers was sort of horrible or tampered or both, each in its own special way. Starting with:
VaR: Value-at-risk is the #1 thing that people talk about when they want to talk about measuring risk. To the point that, if you want to be all “don’t look at one number to measure risk, you jerks,” VaR is the one number you tell the jerks not to look at. Read more »
Once upon a time there was a whale, and he had a synthetic credit portfolio, and one day he did terrible terrible things with that synthetic credit portfolio, and the next day he woke up and realized he had lost $5.8 billion, and he was sad. The question for you is: was that a disaster? I think a sensible answer is:
Having a sense of proportionality here is a good idea. For one trader, losing six billion dollars, give or take, really is in the far left tail of Worst Things You Can Do, and so the whale himself was fired in infamy, though an infamy mixed with a certain envy. For his direct manager and that manager’s manager, it is probably even worse, since failing to prevent your direct report’s $6 billion loss lacks the “wow-that-takes-balls” element of actually going out there and losing six billion dollars like a whale. So they were fired too. For the bank … meh. For the Second Bank of North-Central Indiana, I’m sure losing six billion dollars would be the sort of existential disaster that would require firing the CEO, tearing down the building, and salting the earth on which it stood, but there’s a reason this didn’t happen at the Second Bank of North-Central Indiana. It happened at JPMorgan. For which it wasn’t all that much of a disaster.3
What about for JPMorgan’s regulators? I go with, like, our financial system is still here, not really any the worse for wear, but others disagree, and regulators don’t have the same “well we were profitable for the quarter” defense that JPM had.4 And so today the Fed and OCC engaged in a well-lawyered barn-door-closing exercise, issuing consent orders to JPMorgan that basically say (1) you done fucked up, but (2) you fixed it, so (3) keep doing what you’re doing. Here is the Fed: Read more »
Jamie Dimon, the CEO of the country’s largest bank by assets, says that regulating Wall Street pay could put us on the road to communism. “We all want an equitable society. We need to have a conversation about what makes it equitable,” the JPMorgan Chase CEO said at The New York Times DealBook conference on Wednesday. “You can go do it the way that Cuba tried. Okay, well, then it will be equitable, but everyone won’t have much.” “If you don’t want a free society, then start dictating what compensation can be,” he added. [HuffPo via Counterparties]
J.P. Morgan named finance executive Marianne Lake to succeed Douglas Braunstein as chief financial officer of the largest U.S. bank. The appointment makes Ms. Lake one of the most powerful women on Wall Street as the New York company shuffles its leadership and recovers from a massive trading loss. The 43-year-old Ms. Lake currently is chief financial officer for the bank’s consumer unit. J.P. Morgan said that Mr. Braunstein will become a vice chairman of the company following Ms. Lake’s transition to the CFO position in first quarter 2013…Ms. Lake is known within the company as smart and assertive in the style of Mr. Dimon. “She talks so fast because she knows her numbers so well,” said a person close to the bank. [WSJ]
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: Read more »
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]