Carl Levin On JPM's Exploitation of the Loophole Which the Fed and Treasury Helped to Create

Carl Levin does a good job of bringing the discussion back on point again and again.

Tavakoli: JPMorgan May Be a Trading Accident Waiting To Happen

I think the next financial crisis is less than two years away, and it will strike the global real economy as badly as the banking crisis with the collapse of Lehman Brothers.

Jamie Dimon's SNAFU: JPMorgan's Other Derivatives' Losses
By Janet Tavakoli
05/12/2012

In an August 2010 commentary about JPMorgan's losses in coal trades I wrote: "The commodities division isn't the only area in which JPMorgan is vulnerable. Credit derivatives, interest rate derivatives, and currency trading are vulnerable to leveraged hidden bets. Ambitious managers strive to pump speculative earnings from zero to hero."

At issue is corporate governance at JPMorgan and the ability of its CEO, Jamie Dimon, to manage its risk. It's reasonable to ask whether any CEO can manage the risks of a bank this size, but the questions surrounding Jamie Dimon's management are more targeted than that. The problem Jamie Dimon has is that JPMorgan lost control in multiple areas. Each time a new problem becomes public, it is revealed that management controls weren't adequate in the first place.

JPMorgan's Derivatives Blow Up Again

Jamie Dimon's problem as Chairman and CEO--his dual role raises further questions about JPMorgan's corporate governance---is that just two years ago derivatives trades were out of control in his commodities division. JPMorgan's short coal position was over sized relative to the global coal market. JPMorgan put this position on while the U.S. is at war. It was not a customer trade; the purpose was to make money for JPMorgan. Although coal isn't a strategic commodity, one should question why the bank was so reckless.

After trading hours on Thursday of this week, Jamie Dimon held a conference call about $2 billion in mark-to-market losses in credit derivatives (so far) generated by the Chief Investment Office, the bank's "investment" book. He admitted:

"In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored."


But lets get back to commodities. For several years, legendary investor Jim Rogers has expressed his concern to me about JPMorgan's balance sheet, credit card division, and his belief that Blythe Masters, the head of JPMorgan's commodities area, knows so little about commodities. Jim Rogers is an expert in commodities and is the creator or the Rogers International Commodities Index. He also sells out-of-the-money calls on JPMorgan stock. So far, that strategy has worked out well for him. (Rogers gave me permission to publicly reflect his views and his trades.) Moreover, JPMorgan is still grappling with potential legal liabilities related to the mortgage crisis.

Is Jim Rogers justified in his harsh view of JPMorgan's commodities division? After he expressed his concerns, JPMorgan's coal trade made the news, and it appeared to me that Jim Rogers is on to something. For those of you who missed it the first time, my August 9, 2010 commentary is reproduced below in its entirety. Dawn Kopecki at Bloomberg/BusinessWeek broke the story wherein Blythe Masters' quotes first appeared...

Read the rest here.

JPMorgan Used Political Influence With Fed and Treasury to Create London Loss Loophole In Volcker Rule

"It is impossible to calculate the moral mischief, if I may so express it, that mental lying has produced in society. When a man has so far corrupted and prostituted the chastity of his mind as to subscribe his professional belief to things he does not believe, he has prepared himself for the commission of every other crime."

Thomas Paine

Using political influence with the Fed and the Treasury, JP Morgan overrode concerns at the SEC and CFTC to create a broad loophole in the Volcker Rule which was designed to allow them to continue risky and highly leveraged 'prop trading' in their CIO unit under the phony rationale of 'portfolio hedging.'   This is the backstory on the antics of the 'London Whale' and quite likely their rationale of 'hedging' to justify enormous and manipulative positions in other markets.

Throughout the lead up to the financial crisis, banking lobbyists used their friends at the Fed and the Treasury to suppress the warnings of regulators and undermine reforms to protect the public interest.

One of the most infamous instances was the bullying of Brooksley Born and the silencing of her warning as chairman of the CFTC by Alan Greenspan, Robert Rubin, and Larry Summers.   PBS Frontline: The Warning.

This crony capitalism is one of the reasons why the financial system collapsed, and why the markets are still so dangerously unstable, despite the determined efforts to disguise it with liquidity and lax regulation. The responsibility for this goes back to the Clinton and Bush Administrations at least.

Obama was elected with a mandate to reform, but instead packed his Administration with Wall Street figures. He has one of the worst records for pursuing financial frauds in the last twenty years.

It is time to stop apologizing for and tolerating the soft corruption that has characterized the Obama Administration's policy on the financial sector since day one. The price of giving him a pass on this failure to do his job and making excuses for him is too high.    The excuse that Romney will be worse is not acceptable.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

NY Times
JPMorgan Sought Loophole on Risky Trading
By Edward Wyatt
May 12, 2012

WASHINGTON — Soon after lawmakers finished work on the nation’s new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank.

Several visits over months by the bank’s well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking.

Even after the official draft of the Volcker Rule regulations was released last October, JPMorgan and other banks continued their full-court press to avoid limits.

In early February, a group of JPMorgan executives met with Federal Reserve officials and warned that anything but a loose interpretation of the trading ban would hurt the bank’s hedging activities, according to a person with knowledge of the meeting. In the past, the bank argued that it needed to hedge risk stemming from its large retail banking business, but it has also said that it supported portions of the Volcker Rule.

In the February meeting was Ina Drew, the head of JPMorgan’s chief investment office, the unit that suffered the $2 billion loss...

JPMorgan wasn’t the only large institution making a special plea, but it stood out because of Mr. Dimon’s prominence as a skilled Washington operator and because of his bank’s nearly unblemished record during the financial crisis.

“JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging,” said a former Treasury official who was present during the Dodd-Frank debates.

Those efforts produced “a big enough loophole that a Mack truck could drive right through it,” Senator Carl Levin, the Michigan Democrat who co-wrote the legislation that led to the Volcker Rule, said Friday after the disclosure of the JPMorgan loss.

The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.

Portfolio hedging “is a license to do pretty much anything,” Mr. Levin said. He and Senator Jeff Merkley, an Oregon Democrat who worked on the law with Mr. Levin, sent a letter to regulators in February, making clear that hedging on that scale was not their intention.

“There is no statutory basis to support the proposed portfolio hedging language,” they wrote, “nor is there anything in the legislative history to suggest that it should be allowed.”

While the banks lobbied furiously, they were in some ways pushing on an open door. Officials at the Treasury Department and the Federal Reserve, the main overseer of the banks, as well as the Comptroller of the Currency, also wanted a loose set of restrictions, according to people who took part in the drafting of the Volcker Rule who spoke on the condition of anonymity because no regulatory agencies would officially talk about the rule on Friday.

The Fed and the Treasury’s views prevailed in the face of opposition from both the Securities and Exchange Commission and the Commodity Futures Trading Commission, which regulate markets and companies’ reporting of their financial positions. Both commissions and the Federal Deposit Insurance Corporation, which insures bank deposits, pushed for tighter restrictions, the people said...

Read the rest here.

Gold Daily and Silver Weekly Charts - Facebook Cometh, So Paper Prevails

More capping pressure on the metals today. With Open Interest holding steady and the accumulation patterns intact it seems more like short selling to hold down price. That can only last for so long, and is the stuff of V bottoms.

The Facebook IPO prices next Thursday and that is a 'big event' for the Street.

But let's see how Europe fares. Liquidity panics are painful in the short term. I do not favor any stocks for now, and maintain gold bullion positions with hedges. As always I do not touch any long term positions.

I have posted the Comex option dates below for the next few months. This is traditionally a heavy delivery period for the next two months, so let's keep an eye on how that goes. These low prices might be considered a gift for those seeking physical bullion.

As the swallows return to San Juan Capistrano, so the children, or I should say young men and women now, return from university and their far flung enterprises this evening.

And so the old man must take his early leave, and make preparations for their return, and especially the return of their hearty appetites.

Have a pleasant weekend.

May 24 Comex June gold options expiry
May 24 Comex June copper options expiry
May 26 Comex June miNY gold futures last trading day
May 29 Comex May silver futures last trading day
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June 26 Comex July silver options expiry
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June 26 Comex July silver futures last trading day
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June 29 Comex July silver futures first notice day
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June 29 Nymex July platinum futures first notice day