• 17 Dec 2012 at 3:20 PM

SEC OKs Plan To Devastate Copper Market, Economy

Always looking to keep things interesting, the SEC has approved plans for an exchange-traded fund that will “wreak havoc on the U.S. and global economy.”* Read more »

I enjoyed Bloomberg’s story about how the SEC was pestering JPMorgan to better disclose its proprietary trading activities well in advance of the London Whale fiasco. If you just read the headline you’d be all “oh look how prescient the SEC was,” but if you read the actual letters, not so much. Here is my favorite exchange:

SEC: Identify the trading desks and other related business units that participate in activities you believe meet the definition of proprietary trading. Identify where these activities are located in terms of your segment breakdowns. Quantify the gross revenues and operating margin from each of these units. We note your disclosure on page 59 of your Form 10-K for the year ended December 31, 2010 that you have liquidated your positions within Principal Strategies in your former Equities operating segment. It is not clear if this was the extent of your proprietary trading business. Please clarify if there are other proprietary trading businesses. If there are, please clearly identify the extent to which such activities or business units have been terminated or disposed of as well as the steps you plan to take to terminate or dispose of the rest of these components.

JPMorgan:1 … The Firm believes that the Staff’s comment regarding the disclosure on page 59 relates to the Form 10-K filed by a registrant other than JPMorgan Chase.

Hahahahaha true, it’s Goldman Sachs. Read more »

Justin Bieber definitely makes a bunch in the bank, but he doesn’t seem to know so much about banking. When the teenybopper star and his crew hit Susan Sarandon’s ping-pong club SPiN Wednesday, they were directed to a private room away from the masses, but told they’d have to give up the space at 6:30 p.m. for a private party. When the time came, a spy says, a SPiN staffer popped into Bieber’s VIP room to tell him it was time to go. The singer’s posse didn’t want to leave and started to kick up a fuss, but they were told, “We’re really sorry, the room is booked . . . J.P. Morgan is having a private party.” Our spy says Bieber then piped up and shot back, “Why does he get the room and not us?” [NYP via Tracy Alloway, related]

Mortgage-backed securities are sort of conceptually simple – put mortgages in a pot, stir, sell layers of resulting goop – but complex in execution; they have not only economic but also legal and accounting and bankruptcy purposes and so their offering documents are long and boring and filled with dotted and dashed lines and arrows and boxes and originators selling to sponsors selling to depositors selling to trustees selling to underwriters selling to investors. All those arrows serve as a finely calibrated series of one-way gates; each link in that chain is meant to shield the person before the link from something, some real or imaginary claim from the people coming after the link, allowing originators/sponsors/etc. to tell themselves “I never need to worry about those mortgages again!”

Hahahaha no they totally do. Today the Journal and the FT have stories about a possible JPMorgan SEC settlement on some Bear Stearns mortgage practices, specifically (per JPM’s filings) “potential claims against Bear Stearns entities, JPMorgan Chase & Co. and J.P. Morgan Securities LLC relating to settlements of claims against originators involving loans included in a number of Bear Stearns securitizations”. If you’re keeping score these are:

  • not the thing where Bear maybe did a shoddy job underwriting mortgages, and
  • not the New York state lawsuit involving, besides the shoddy underwriting, Bear Stearns’ settlements of claims against originators, but rather
  • the SEC’s investigation of what seem to be those same settlements of claims against originators.1

This is how the FT describes it: Read more »

  • 12 Oct 2012 at 5:05 PM
  • Banks

London Whale Swims Off Into The Sunset

Hi Whale! I told you you were not forgotten. Not understood, either, but not forgotten.

The London Whale now goes by the less adorable name “synthetic credit portfolio,” since all mammalian representatives of that portfolio have left for non-extradition countries. That is descriptive enough, or so I would have thought; my rough model of the London Whale position was a combination of basically long IG index synthetic credit by selling protection on 10-year CDX.NA.IG.9, untranched or senior tranches, and short higher-beta synthetic credit bits by buying protection on high-yield indices, junior tranches, something like that.

But it’s also possible that the London Whale position is basically a blob of green glowing radioactive material that just deals indiscriminate pain everywhere it goes. So, for instance, this quarter, after causing massive and time-traveling losses last quarter and being mostly unwound and/or moved from the Chief Investment Office to the investment bank, it still managed to lose money in not one but two places – the investment bank, where the bulk of its ominously pulsing self “experienced a modest loss,”1 but also the CIO, where its mangled remnants lost $449 million on about a $12bn notional remaining position, or about 3.75% of quarter-initial notional.2

You can think a range of cynical things here. The most supportable, perhaps, is that CIO’s daily VaR was $54mm last quarter3, meaning that the CIO’s loss this quarter was a little over 8x its daily VaR, which is, um, high? A quarter is 65ish trading days; if you assume VaR goes with the square root of time then CIO’s quarterly 95%-confidence-interval VaR was about, oh call it $449 million, meaning roughly that 95% of the time it would have lost less than it did, yet here we are. Of course there’s the other 5% of the time, where the whale seems to live, but … I mean, that is an odd number and might make you quietly ponder JPMorgan’s new VaR model.4 BONUS FOOTNOTE!5 Read more »

  • 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: Read more »

There are many great businesses in the world but surely none is as great as being paid money not to do stuff. I was in that line of work for two glorious months in the summer of 2011 and I’m pretty sure it was the peak of my career. Counterintuitively this business is not always massively scaleable,1 but there are some examples. My favorite is that in the 1980s companies would pay Skadden Arps a retainer fee to prevent Skadden from representing a hostile acquirer; I have idly suggested that David Einhorn look into charging similar fees to direct-marketing companies who want peaceful earnings calls.

If I were Moody’s I’d have a sliding scale of CMBS fees that goes like:

J.P. Morgan seems to have opted for false economy: Read more »