J.P. Morgan has added at least five new employees over the past month to the risk department in its Chief Investment Office, the unit responsible for trading losses that may have climbed to $9 billion, according to people familiar with the matter. The bank is expanding the risk unit as it responds to the trading debacle and rebuilds the CIO, said one person familiar with the bank’s thinking. [FINS]
Saba Capital Management’s Boaz Weinstein recently exited a now famous and profitable credit derivative bet against JPMorgan, according to sources familiar with the trade. In May, JPMorgan reported a $2 billion trading loss in its chief investment office, due to large bets on an obscure group of indexes that track the performance of corporate bonds, including the Markit CDX NA IG Series 9 index. Weinstein’s Saba, among other funds, bet against that trade. Saba, which has liquidated its position in its entirety, “exited directly to JPMorgan’s CIO office,” according to a source familiar with the hedge fund. Weinstein, a former Deutsche Bank trader, was one of the early proponents of a trade that involved buying Investment Grade Series 9 10-Year Index CDS, discussing it at the Harbor Investment Conference in February. Ironically, the conference was held at JP Morgan’s Madison’ Avenue offices. [Reuters]
Congressman: “Mr. Dimon, is it possible that JPMorgan could lose $2 trillion?”
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Mr. Iksil [who sometimes wore the same clothing several days in a row] once confided to the colleague that when he wanted to avoid questions from supervisors about his trades, he sometimes would start discussing a mathematical term, equation or other technical jargon, to confuse and end the conversation. “He wasn’t trying to evade, he sometimes just didn’t have patience if it was his trading idea,” the colleague said. [WSJ]
“He didn’t win. He’s a loser. How? You lose when you go in front of Congress and you lose when you go out. Anyone that declares him a winner is wrong…He walked in a loser. Testified. Walked out a loser. And by the way, he agrees with me. He knows he’s a loser with no control and doesn’t even know what happened in his own bank…A loser. Crisis PR is psychiatry. You go in there as a guy who is stupid, you don’t come out being smarter. You don’t. You come out just as stupid…He’s a loser…This is not Michael Corleone with Frank Pentangeli in the back of the room. This is not Nevada gaming licenses…He’s a loser. It’s okay, man. He’s a loser. Maybe next year he’ll be a winner but he is a loser. Okay.” Read more »
If you’d like some non-real-time insight into the London Whale, may I highly recommend this oral history, by Edinburgh sociologists Donald MacKenzie and Taylor Spears, of how investment banks came to price and trade and hedge things like the index CDS that the Whale dabbled in? It made me tear up a little. It is let’s say somewhat technical but it’s not really about math or derivatives, it’s about how people experience their lives in derivatives departments of investment banks.
The main discussion is about the relationship between certain derivative pricing formulas and the credit crisis, and in particular about why ratings agencies did a bad job of rating asset-backed CDOs. The authors attribute these mis-ratings to a cultural problem, in which the people building and rather ABS CDOs were credit-analyst banker type rather than quant types who derive their views from market prices and efficient market assumptions: Read more »
Senator Bob Menendez: I listen to this [hearing] and I paraphrase Shakespeare when I ask, a hedge or not a hedge, that is the question.
Jamie Dimon: [staring] Read more »
They took JPMorgan through the financial crisis “with flying colors.” The Whale stuff was a blip. [Related]
I spend a good 40% of my day mindlessly refresing JPMorgan’s page at the SEC hoping they’ve filed a new structured notes prosupp so I was excited to see this:
Following the Federal Reserve’s announcement on June 7, 2012 of proposed rules which will implement the phase-out of Tier 1 capital treatment for trust preferred capital securities, JPMorgan Chase & Co. announced today that each of the trusts listed below will redeem all of the issued and outstanding trust preferred capital securities identified below on July 12, 2012 pursuant to redemption provisions relating to the occurrence of a “Capital Treatment Event” (as defined in the documents governing those securities). In each case, the redemption price will be 100% of the liquidation amount of each trust preferred capital security, together with accrued and unpaid distributions to the redemption date. The redemptions will be funded with available cash.
You can go read the chart but there’s a total of just under $9bn of trust preferred securities with a weighted average interest rate of just over 7%, all being redeemed at par.*
These trust preferred securities are, to simplify ever so slightly, very long-term very subordinated debt securities that qualify as capital for JPMorgan: for the purposes of convincing regulators that JPMorgan is well capitalized, they were roughly as good as common stock, but they are cheaper for the bank because they cost only a 5.85 to 7% (tax deductible) coupon, vs. JPMorgan’s 16% trailing return on tangible common equity or its 13-ish% trailing earnings yield or however you want to compute the cost of its common stock. After last week’s announcement of revisions to the capital rules, these securities will (eventually) no longer qualify as useful ”tier 1″ regulatory capital. Under the terms of the securities, if they will no longer qualify as tier 1 JPMorgan has the right to get rid of them, since they were a capital-regulation arbitrage to begin with. And so they will.
WHAT COULD BE MORE BORING. Still, two idle thoughts. Read more »