Is JPMorgan too big to manage the quantity of public confusion about its operations? Maybe? This Reuters story about how JPMorgan was betting against its own Whale trades is a bit silly: the fact that JPMorgan’s investment bank dealer desk may have been long (short) some of the instruments that JPMorgan’s Chief Investment Office was short (long) is not all that noteworthy. JPMorgan contains multitudes; the dealer desk and the CIO sit in different places and do different things and generally might have similar, offsetting, or entirely unrelated positions.1 In fact if you assume that the positions at issue here were mainly the Whale’s massive CDX NA IG position – he was very very long index credit, among other trades – you could imagine that the dealer desk would sort of naturally be short the same thing. A big part of a dealer’s job is to (1) write single-name CDS to people who want to short particular names and (2) buy index CDS to hedge.2 So it would naturally be looking to buy index protection, and if a certain whale of its acquaintance was selling – why not?
Still there is a piece of news here, which is this:
Two people familiar with Iksil and his boss, Javier Martin-Artajo, said the two CIO employees complained about the investment bank’s actions in the spring of 2012, accusing its traders of deliberately trying to move the market against the CIO by leaking information on its position to hedge funds. Iksil made his complaint to a member of JPMorgan’s compliance department, one of the people said. But those same sources said they had not seen any evidence to support that claim …
So, maybe news? There’s no evidence to support it; perhaps it’s just the Whale’s (retrospectively justified?) persecution complex. Still: the Whale crew thought that the investment bank were trying to make them take losses. Imagine that it’s true! Why would it be true? Read more »
I’m mesmerized by this JPMorgan research chart showing that big banks shouldn’t be broken up because they lend so much more to businesses and consumers than small banks do. See:
Basically for every dollar of normalized capital, JPMorgan has extended $12 of credit between March 2010 and September 2012, according to this note by JPM’s Michael Cembalest. Whereas the small banks have loaned out only about $2. Get with the program, small banks!
The trick here – besides “normalized capital”1 – is that “credit extended” means (1) “changes in commercial and consumer loan balances” plus (2) syndicated loan, corporate bond, muni bond, etc. underwriting. That is, if you stand between a company looking for money and the market that provides it, you get, um, credit for extending credit, whether you do that standing-between in traditional banking ways (take deposit, make loans) or in traditional investment banking ways (match bond buyer with bond issuer). “See, we’re lending,” says JPMorgan. “We’re just not lending our money.”2
As a rhetorical move, I say: A+. Read more »
Financial innovation gets kind of a bad rap, and one of my favorite parts of this job is when I get to celebrate it just for being itself. Sometimes this means breathtaking magic like the derivative on its derivatives that Credit Suisse sold to itself, or elegant executions of classic ideas like the Coke shares that SunTrust sold for regulatory purposes but not for tax purposes. Other times it’s a more prosaic combination of already-existing building blocks to allow people who were comfortably doing something to keep comfortably doing it in the face of regulations designed to make it more uncomfortable.
Yesterday a reader pointed me to a Bond Buyer article that, while perhaps neither all that scandalous nor all that beautiful, is sort of cozy. It’s about a new issue of callable commercial paper issued by a Florida municipal financing commission, and here’s the joke:
JPMorgan came up with the new product as a solution for variable-rate municipal issuers facing impending Basel III regulatory problems. The proposed regulations would require banks to have a certain higher value of highly liquid assets to be available to turn into cash to meet liquidity commitments that could be drawn within 30 days. Maintaining higher liquidity would be expensive for banks, which may try to pass on costs to its issuers, according to an analyst at Moody’s Investors Service. “What we did, starting over a year ago, is ask what we can do to change the product that will still work for all the players, including issuers, investors, and the rating agencies,” Lansing said. “And the ultimate result was this product.” The new product allows banks to continue to support variable-rate products after the regulations are implemented. The paper has a variable length of maturity, but always at least 30 days. Several days before the paper would have 30 days left to its maturity, the issuer calls the paper.
The joke isn’t that funny, though I giggled at the phrase “a solution for variable-rate municipal issuers facing impending Basel III regulatory problems.” Municipal issuers face no Basel III problems: municipalities are not subject to Basel III. Read more »
I feel like this exchange did not go well for Jamie Dimon:
[Elliott Capital's Paul] Singer said the unfathomable nature of banks’ public accounts made it impossible to know which were “actually risky or sound”. … Mr Singer noted that derivatives positions, in particular, were difficult for outside investors to parse and worried that banks did not always collateralise their positions. Mr Dimon said the bank did for all “major” clients. Mr Singer retorted: “Well, we’re a minor client then.”
Whoops! Guess someone else doesn’t know what positions banks collateralize. I suspect someone at Elliott is already on the phone with JPMorgan to renegotiate their CSA. Also so many other people; I count about $50 billion of uncollateralized (fair value) derivative exposure at JPMorgan, suggesting that it fully collateralizes a little under two-thirds of its trades.1 Perhaps those are the two-thirds with the major clients, but if so that seems a little irrelevant. That’s a lot of minor-client money.
Why does Singer care? Well I guess he wants better collateral terms from JPMorgan? More seriously … there is whatever incentive to say things that always exists at Davos sessions, which I guess is a thing, ugh.2 Then there is the broad question of whether banks are too opaque to invest in. Singer is not alone in thinking that the answer is no; we talked a while back about how a lot of smart people get kind of freaked out by bank financial statements; derivatives, as well as other buzzwords like prop trading and opacity, play a role in their conclusions as well. Also here is a funny article about how 60% of Bloomberg subscribers are basically commie anarchists: Read more »
“At first I thought it was a friend of mine pulling a prank. I thought it was Lloyd Blankfein,” Jamie Dimon said yesterday in Germany, re: the time Tom Brady called to cheer him up about JPMorgan’s $6.2 billion trading loss. He didn’t elaborate but it’s pretty obvious that the day Goldman was sued over Abacus, Dimon called over to GS pretending to be Aretha Franklin, telling Lloyd “no one’s got any R-E-S-P-E-C-T for clever investment products,” while months after JPMorgan bought Bear Stears, JD received a call from someone claiming to be “Jimmy Cayne” calling from the lobby with a sample of 90210 kush that he insisted Dimon had to come down and try but “A-SAP, ’cause Big J had to double park his truck.” [Bloomberg]
Back in October, the most wonderful aspect of the JPMorgan Whale Tale emerged in the pages of Vanity Fair: the day Vice-Chairman Jimmy Lee barricaded himself in his office determined to come up with a way to help Jamie Dimon, and after hours of thinking real hard, summoned his six secretaries and told them they had a job to do, which was getting Tom Brady on the horn so he could deliver a pep talk sure to cheer up the boss. Was the call kind of awkward, considering the two had never spoken and Brady’s lack of useful investment ideas likely meant his big speech involved not much more than ”Even Super Bowl champion quarterbacks have bad days” and “Keep your chin up out there?” Probably. And yet some sort of bond was clearly forged, which would explain why Dimon felt compelled to throw Brady this bone: Read more »
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:
- Well, for the whale, yes.1
- For, like, the human race, nah.2
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 »
…a growing number of self-flagellating New Yorkers who treat — then beat — themselves post-holidays by temporarily giving up vices such as alcohol and sweets, sometimes replacing them with liquid diets (blue-green algae juice and garlic-oregano shots, among them). According to Denise Mari, owner of Organic Avenue, the uber-popular NYC-based juicing mecca, business has doubled year over year since 2006, with an explosion in volume in 2012. And there’s always a spike in sales this time of year with those desperate to cleanse away their sins. “People tend to go extreme — they need to be kicked in the ass,” says Danielle Pashko, a longtime NYC nutritionist who guides high-rollers from Citibank, J.P. Morgan and Merrill Lynch. “It’s kind of like a bipolar attitude — splurging with mayhem and nonstop debauchery for weeks, and then total self-deprivation.” “These people are highly successful, competitive and stressed out. They’re cosmopolitan and social and mostly men,” says Pashko…John Cholish may look like any other ripped stud to an outsider: The smoking-hot energy options broker who boasts 6 percent body fat could intimidate most superheroes. “I’ve always been competitive, and like to challenge myself,” says the 29-year-old from Long Island City who has detoxed regularly for more than a decade. But he’s no match for his 110-pound feather of a girlfriend, Brianna Cole, 24. “My girlfriend and I will do a little competition, but she tends to beat me; I’m probably 0 for 4,” he admits sheepishly of their fasts — during which they give up sugar, caffeine, alcohol and simple carbs for a minimum of several days. [NYP]
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.
But it’s an interesting, and broadly encouraging, read in a circle-of-life way. Things are, or were in June, pretty good, or at least improving, credit-wise:1 Read more »