JPMorgan Reports Voldemort's Earnings, Some Other Stuff

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JPMorgan had a ... quarter, whatever, goreadaboutit. Top and bottom-line beats with revs up and net income down y/o/y. And JPMorgan's investment bank had a ... you'd have to say pretty good quarter, with fees still not where I'd like to see them as a former fee-getting banker but with FICC bouncing back nicely from last quarter.

But who cares about the investment bank? Turns out we've been looking at the wrong JPMorgan all along, per this sweet Bloomberg story that examines the London Whale in his native ecosystem:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has transformed the bank’s chief investment office in the past five years, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes.

Achilles Macris, hired in 2006 as the CIO’s top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said. Dimon, 56, closely supervised the shift from the CIO’s previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

Some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms.

Har har har. Much of my admiration for Jamie Dimon comes from the fact that JPMorgan more or less does what Goldman is always accused of doing, and more or less gets away with it, so it's nice to have proof that JPMorgan is Just A Giant Hedge Fund Masquerading As A Bank. And the story is juicy; I loved the description of Macris as "always ha[ving] off-the-wall ideas, but in hindsight sort of smart ideas," which golly I have met people like that and I wouldn't necessarily trust them with all my cash.

But anyway it all sounds very hedge fundy, and there are some ominous signs: as Bloomberg points out, "One public sign that the chief investment office does more than hedge: Its trading risk is on par with that of JPMorgan’s investment bank." True, or close enough. Here is JPM IB VaR vs. CIO VaR ($mm 95% daily VaR, reported page 42 here and, for 2010, page 38 here):

But ... Jamie's not exactly getting a ton for his money. Here is dollars of quarterly revenues per dollar of average daily VaR for the investment bank (IB net revs divided by IB total VaR including credit portfolio) and for the chief investment office (VaR is reported; I eyeball revs as securities gains in Treasury & CIO from page 35 hereplus net interest income from page 34; that is kind of wholly arbitrary and also CIO appears not to mark to market so "securities gains" is not comparable to to MTM gains, but do you have better ideas?):

Or, if you like, revenues to assets (same caveats on what "revenues" means; assets are IB total assets from page 11 of today's supplement and treasury & CIO average investment securities portfolio from page 35):

So you could read this as something like: of course JPMorgan gets a lot more revenues out of a largely fee/commission/spread-earning business like IB than it does out of a largely buy-and-hold business like CIO. True. Or you could read it as: shut up, JPM's not marking CIO to market makes this whole exercise completely silly, maybe the internal hedge fund is making truckloads of money on a mark-to-market basis and would be blowing out the investment bank if they reported comparably. Also true. But if you divide those charts by each other you'll notice that CIO's balance sheet - y'know, "managing the long-term structural assets and liabilities of the firm and is not focused on short-term profits" - actually seems to be riskier than the daily-traded inventory of the investment bank (VaR per balance sheet, in basis points):

So, I don't know. With declining activity, increasing regulation, etc. etc., maybe investment banking isn't as great a business as it used to be. But I suspect it remains better than giving all your money to some CIO kooks and asking them to buy up all the structured credit that there is in the world.

Earnings Release
Earnings Presentation
Earnings Supplement
JPMorgan Said to Transform Treasury to Prop Trading [Bloomberg]

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JPMorgan's Voldemort Probably Isn't That Magical

John Carney has hilariously convinced a bunch of people that JPMorgan whale-wizard Bruno Iksil could actually be running a synthetic bank on top of JPMorgan's actual bank. The theory, propounded to him by a mysterious trader and sort of supported by an old PIMCO client note, is that Iksil was tasked with hedging JPMorgan's inflation risk and did so by putting on a trade that was (1) long TIPS (for the inflation) + (2) long [write protection on] CDX (for the yield). Now I will tell you a thing, which is that I hedge my inflation risk by being (1) long TIPS (for the inflation) + (2) long MegaMillions tickets (for the yield),* but nobody calls me Voldemort. Here is Doug Braunstein's theory about Iksil: On a conference call with analysts, Braunstein said the positions are meant to hedge investments the bank makes in “very high grade” securities with excess deposits. (J.P. Morgan has some $1.1 trillion in worldwide deposits.) Braunstein said the CIO positions are meant to offset the risk of a “stress-loss” in that credit portfolio. He added the CIO position is made in line with the bank’s overall risk strategy. What can that mean? Presumably the sensible view to take from this is that this is actually part of a "stress-loss" hedge; the CIO is short (bought protection on) a lot of shorter-dated corporate credit and funds it by being long (selling protection on) a lot of longer-dated (5-year) corporate credit, so as to be relatively DV01-neutral but long jump risk. This has the advantage of (1) actually hedging a stress loss in high-grade short-term corporate securities, (2) fitting in with the relative lack of noise in the CIO portfolio,** (3) being what people have told Bloomberg he was doing, and (4) being what JPMorgan has actually said it's actually done in the CIO during the crisis. So it's probably true no? But it's fun to pretend! If you pretend Carney is right you can have one of two views.*** One is Izabella Kaminska's, which is "sure, I guess this is a hedge, but boy is it a mysterious one." You can buy this if you have - as she does - a pretty postmodernist view of what a hedge is. I do too, mostly.

You Say "Voldemort" Like That's A Bad Thing

Do you think that Bruno Iksil, when he woke up in Paris on Friday looking forward to trading from home in his black jeans, expected to become an international celebrity? The evidence suggests not. You may remember Iksil - possibly under other names like "Voldemort" or "the London Whale™" as the JPMorgan chief investment office trader who has sold protection on $100bn of notional of a CDX investment grade index to ... hedge ... JPMorgan's massive short position in credit ... or ... something?* Anyway a lot of people are mad at him because that's just too much protection to sell on that index and so they are complaining to Bloomberg and the Journal about how he is manipulating the market and also taking huge proprietary risks with JPMorgan capital that should obvs be regulated out of existence. This is weird in a lot of ways but one of them is that you can distill a lot of the Volcker-Rule complaints into "my God, you're telling me that JPMorgan is exposed to $100bn of credit risk on investment-grade debt issued by a diverse mix of 121 U.S. companies!?" No! JPMorgan is exposed to something like $750bn of credit risk on debt issued by a diverse mix of companies. Some of it's non-US. Some of it's not even investment grade. And that's just in its loan book.** Is writing $100bn of protection on the CDX.IG.NA.9 a terrible risk to take with investor and depositor and government-backstop money? Well, define "terrible risk." It's certainly less risky than operating the rest of JPMorgan.***