10 May 2012

Sharkboy Hits Dock - JPM Takes 'Significant Loss' in Derivatives Book - 'Could Get Worse'

 How Are the Mighty Fallen
“The enormous loss was just the latest evidence that what banks call ‘hedges’ are often risky bets.”

Senator Carl Levin

"From top to bottom of the ladder, greed is aroused without knowing where to find a comfortable foothold. Nothing can calm it, since its goal is far beyond all it can attain. Reality seems valueless by comparison with the dreams of fevered imaginations; reality is therefore abandoned."

Emile Durkheim

After the bell JPM announced that it is taking a $2 Billion loss in its London derivatives book. The news drove down US bank stocks and the SP futures dropped a quick 12 points.

A Treasury official, speaking off the record, noted, "We may be dancing on the edge of a crevasse, but we're still better than Europe. Neener neener."

Isn't this transformation of the CIO office at JPMorgan part of Jamie Dimon's strategy to skirt curbs on proprietary trading and take very large positions in OTC derivatives in order to greatly increase bank profits?

I thought we were told that these massive bets were in the CIO section because they were 'hedges against risk' for JPM's corporate portfolio exposure.  You know, the same way that Blythe Masters has assured the public that their massive bets in commodities are all merely hedges?

See JPM 'London Whale' Trader Bruno Iksil Driving Derivatives Market With 'Massive Positions and Excess Capital'

Smells like the Corzine strategy at MF Global to me. And it was even being run out of London, the locus of financial frauds. What a coincidence!

Wait until their commodity derivatives book blows up.  When Blythe Masters famously said that 'the rest of the market is scared shitless of us' perhaps it was true, but not for the reasons that she had imagined.

I hope this doesn't hurt all the 'civilized people' who have their money tucked away in bank shares. The disclosure earlier today from Chris Whalen about Wells Fargo's accounting practices might have made Charlie Munger soil his wee undies. Well at least he is confident that the US will once again provide bailouts at the expense of 'handouts' to the poor and middle class.

Someone has to step in and protect capitalism from the capitalists. They'll never learn on their own.

JP Morgan Reveals Large Trading Loss; Shares Hammered
By Avi Salzman
May 10, 2012, 5:29 P.M. ET

JPMorgan Chase (JPM) fell 6.5% after-hours after saying it incurred “significant mark-to-market losses in its synthetic credit portfolio.”

CEO Jamie Dimon apologized on a conference call at 5 p.m. for “egregious mistakes” and an “unbelievably ineffective” trading strategy meant to hedge trading positions.

He said the company’s Corporate division was likely to post an $800 million after-tax loss, higher than its previous expectations for a plus or minus $200 million. JPM’s chief investment office lost $2 billion on its synthetic credit positions while recording a $1 billion gain, mostly by selling credit exposures(which will blow up at some later date in the manner of financial pyramid schemes - Jesse)

[I]n hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored,” he said, according to an initial transcript. “The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought.

“The strategy was badly executed, badly monitored,” he said, without going into detail about the specific trading strategy.

The company’s 10-Q , released just before the conference call, says:

“Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO’s synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO’s AFS securities portfolio.”

Analysts on the conference call were clearly perplexed by the sudden change. JP Morgan was considered to have among the cleanest balance sheets of the major banks. Dimon also noted that the loss could give fuel to critics who say that banks are still too lightly regulated.

Other major banks were also falling on the news...

What do you mean the vault is 'empty?' 
Financial Times
JPMorgan loses $2bn in ‘egregious’ error
By Tom Braithwaite in New York

JPMorgan Chase announced a surprise $2bn trading loss on credit derivatives trading, which chief executive Jamie Dimon blamed on “errors, sloppiness and bad judgement” and warned “could get worse”.

The shock disclosure, made after the market closed in a regulatory filing, sent shares in the bank down by about 6 per cent and prompted renewed calls for tougher regulation.

JPMorgan said the mark-to-market losses came in the bank’s chief investment office, a unit set up to invest excess deposits, which has drawn controversy after hedge funds alleged it was taking big proprietary bets.

Proprietary trading is set to be banned in the US by the forthcoming “Volcker rule” and the losses revealed on Thursday are likely to stiffen regulators’ resolve to enforce that ban broadly.

Carl Levin, a Democratic senator who has pushed for a strict interpretation of the rule, said “the enormous loss” was “just the latest evidence that what banks call ‘hedges’ are often risky bets”. He called for “tough, effective standards... to protect taxpayers from having to cover such high-risk bets”.

“It plays in to the hands of a bunch of pundits out there,“ Mr Dimon said on a hastily convened conference call. “This trading may not violate the Volcker rule but it violates the Dimon principle.”

...Turbulent credit markets exacerbated flaws in the trading strategy, JPMorgan said. Since the company does not want to conduct a fire sale of its positions, it is stuck with the exposure for some time.

“There is going to be a lot of volatility here and it could easily get worse this quarter – or better, but could easily get worse – and the next quarter we also think we have a lot of volatility,” Mr Dimon said.

JPMorgan also restated its “value at risk”, a measure of maximum possible daily losses, of the CIO in the first quarter from $67m to $129m.

Read the rest here.

Happier Days for Jamie and Blythe with Bruno Iksil at the Wheel

Dramatic re-enactment of JPM's Pan European Derivatives Victory Tour from Zurich to London