It’s becoming increasingly self-evident to anyone who’s been paying close attention over the past couple of weeks that JP Morgan Chase and, consequently, virtually most of the global economy may be in significantly deeper hot water than the public’s been led to believe, to date.
Meanwhile, the headline of the lead story in Thursday’s New York Times is informing us that JPMorgan Chase’s hot water may have just reached its boiling point: “Euro Zone Crisis Boils as Leaders Argue, Failing at Pact.”
(After you read a variety of inconvenient facts and new pieces of information--there is some real news in both parts of this story--in this and Part II of this post, under separate cover, you’ll realize this is somewhat of an understatement.)
Part II of this post is entitled: "WhaleMu–JP Morgan’s Next Surprise?" by Michael Olenick (Part II of II)."
(Continued below the fold.)
(Continued from above the fold.)
"The only thing new in the world is the history you do not know."
--Harry S. Truman
Whether or not “stuff” happens, the reality is that securities markets react to news, rumor and publicized speculation. And, when news (etc.) fuels an atmosphere already rife with economic uncertainty -- something markets detest most of all -- markets sometimes have a tendency to get really ugly. (Think: September 2008.)
Tonight, we first heard initial news reports via the German business wire service, Wirtschaftsnachrichten, about developments in one of the greatest poker games ever played -- a/k/a talks between the European Union, the European Central Bank, German and Greek government leaders regarding the ongoing bailout of that country – telling us: “The Greek Exit Is A Done Deal.”
(More detail on JPMorgan Chase’s grossly-understated--in the MSM, anyway--European sovereign and bank exposure is discussed farther down, below. And, if you discount the potential domino effect of even just a stronger rumor that Greece will be exiting the Euro, and even if you believe that JPMorgan Chase’s recently-publicized losses will be stanched at just $7 billion, there are an easy two or three other major reasons why Jamie Dimon probably isn’t sleeping well these days.)
JPMorgan Chase is the world’s largest player in the derivatives marketplace, with no less than $70 trillion dollars (at JPMC, alone) in “notional” value at risk. (As you’ll learn by understanding the definition of “notional” in the second link in the previous sentence, the actual value at risk to the originating party/bank is usually far less than the face value of these derivatives contracts.)
That being said, for some perspective on the matter, consider this: the world’s entire, annual gross product is approximately $70 trillion. For emphasis’ sake, let me reiterate this. We have one U.S. bank “playing” (in what’s widely acknowledged to be a grossly-under-supervised environment [see below for more on this travesty]; never mind the inconvenient reality that no single corporate entity should ever be allowed to come close to handling this kind of risk by itself, in the first place) with an amount that’s equal to the overall output of the entire world in a year. And, just in case you forgot (Krugman will remind you, below, as well), U.S. taxpayers are backstopping all of this risk!
(Another example: Just a one-quarter of one percent loss [00.25%] on JPMC's overall derivatives portfolio, say for a minor event like...um...a global depression...would generate a $175 billion loss.)
About JPMC’s Reported
$2 $3 $5 $7+ Billion Loss In Europe
Just two weeks ago, we first learned how JP Morgan Chase’s London-based “whale” derivatives trader in the bank's Chief Investment Office, Bruno Iksil, lost $2 billion of the bank’s money in “imperfectly-hedged” derivatives trades. That was the party line, from CEO Jamie Dimon, and then all the way through the bank’s food chain--driving the public narrative right past “go,” and to a “place” where we already know these bank exec’s also automatically pickup a “get-out-of-jail-free” card--and then on through to our own, deeply-captured government right into the corrupt hands of our corporate-owned MSM.
What's JPMorgan Chase's Real Exposure In Europe?
An excerpt from my post here on February 13th, 2012, regarding overall U.S. bank exposure in Europe...
The best piece I've read about this is from one of the world's leading experts on derivatives trading, author Satyajit Das, entitled: "What happens in Europe won’t stay in Europe."
As you'll realize, once you read Das' commentary linked above, in the U.S. it's not even primarily about the U.S. taxpayer's 17%+/- share of the overall funding of the IMF (although U.S. taxpayers are, via the IMF, directly funding tens of billions of dollars of these European bank bailouts, as you read this) for the too-big-to-fail banks' direct investments in sovereign and corporate bonds in Portugal, Ireland, Italy, Greece and Spain (the "PIIGS"). That's a "mere" $80 billion in exposure. (Check this piece of propaganda from the NY Times via Americablog, earlier this month, which completely ignores the real story.) As Das points it out this story is primarily about U.S. banks' direct investments of over $500,000,000,000 (Das tells us it may be more than a trillion dollars) in French and German banks and those banks' direct investments and derivatives plays in the at-risk Eurozone countries.
You see, when a country (or any entity, for that matter) actually defaults on debt, it's pretty much coming right out of the counterparties' pockets, since the very nature of these sovereign and (PIIGS') bank-based derivatives is, literally, all about insurance against defaults.
But, as we learned via links near the beginning of this post, much ($200 billion, give or take) of the initial U.S. and European banks' liabilities in Greece have already been covered in bond exchanges with the European Central Bank and the International Monetary Fund (IMF), which is funded in part (approx. 17%) by U.S. taxpayers. But, as it's noted, just above, as far as U.S. bank exposure is concerned, it's really about (indirect) exposure to other European banks that are heavily exposed to Greece.
As far as JP Morgan is concerned, specifically, here's more on this from the Wall Street Journal's David Reilly, from a week ago:
...For countries such as Germany, France and the Netherlands, J.P. Morgan said it had a net exposure of nearly $150 billion, yet didn't disclose the size of hedges or gross exposures. Muddying the waters further: Major country exposures reported in J.P. Morgan's quarterly report are based on its "internal risk management approach." This differs from cross-border exposures reported under regulatory guidelines, which J.P. Morgan reports only annually.
Is Seattle A City In Europe?
Those regulatory figures show far larger total country exposures because of "commitments." These include undrawn lines of credit but also the value of credit derivatives, where J.P. Morgan has sold credit protection to other investors.
The bank says this measure doesn't take into account offsetting purchases of credit protection. Still, the unnetted figure is interesting in case the offset doesn't work as planned or because a counterparty defaults.
Including those commitments, the regulatory figures show J.P. Morgan had a combined exposure to those three, larger European countries of about $390 billion as of December. This data also show an exposure to Italy of $87.5 billion and to Spain of $57.5 billion, far larger than the netted figures. Similar differences can be seen at other big banks as well.
Playing down the larger, gross figures, Mr. Dimon said on an earnings call last year that the numbers don't "include hedging. And we do a lot of hedging, both specific name and country hedging."
Back then, that put investors at ease. Not so much today.
While it’s barely being mentioned anywhere in the MSM – and, in large part thanks to the dogged determination of Michael Olenick, as you’ll learn in Part II of this post – the fact of the matter is that JPMC expanded their Chief Investment Office’s asset management functions by some 200-300% back in 2008-2009, primarily to facilitate the hedge plays, and the investment management tasks, associated with their U.S. taxpayer-backed acquisition by JPMC of Washington Mutual, which is now on the record books as the largest bank failure in U.S. history. (Note: last I checked, WaMu was headquartered in the state of Washington, a bit of a geographic stretch from Europe, where the problems mentioned in this story supposedly originated.) And, based upon reported timelines in the MSM over the past couple of weeks, it wasn’t until after that occurred that Bruno Iksil came into the game and started buying up every toxic British and Dutch collateralized debt obligation (CDO) he could get his hands on over on the other side of the pond. (That’s the official JPMC party line these days, in any event.)
From Michael Olenick, in Part II of this post, quoting the lead article in the May 11th edition of the New York Times…
Nelson D. Schwartz and Jessica Silver-Greenberg of the New York Times verify that the purpose of the Chief Investment Office — the London Whale — is to offset risk caused by the Washington Mutual loans:
Under Mr. Dimon’s leadership, the chief investment office — which was responsible for the outsize credit bet — was retooled to make larger bets with the bank’s money, a former employee said. Bank executives said the chief investment office expanded after JPMorgan Chase’s 2008 acquisition of Washington Mutual, which added riskier securities to the company’s portfolio. The idea behind the strategy was to offset that risk.
A week after the story broke, which brings us to last Thursday, the 17th, we were reading and hearing how JP Morgan Chase’s London-based “whale” derivatives trader in their Chief Investment Office, Bruno Iksil, hadn’t lost a mere $2 billion of the bank’s money on “imperfectly hedged” bets, as it was announced the previous week. During those first seven days, give or take, that number had been growing at a $150 million-per-day clip. And, based upon market moves against the firm along with other realities, as of the beginning of this week, it had grown to the point where losses were being estimated by JPMC insiders to be as much as
$3 billion-plus $5 billion-plus $7 billion-plus
a 50% jump a 150% jump
a 250% jump -- since the story first broke, on May 10th. Some are saying, and others are beginning to speculate, that JPMC’s obfuscated/highly-opaque losses are exponentially more than this -- perhaps somewhere in the $50- to $100-billion range, if not higher
(more about that in Part II of this post
Off The Rails...
Again, what we “know,” right now, is really what amounts to little more than the status quo’s party line. But, we already (now) know it’s nowhere near the
complete truth whole story.
The issues affecting this tale’s eventual outcome, along with the few realities/facts that are now coming to light (combined with other matters noted herein), point to the greater truth that JPMorgan Chase really doesn’t know where their horses are, other than the fact that they’ve already left the barn, and barring taking a major, short-term loss via the immediate sale of their problematic market positions now, they’re subject to market forces and news events beyond their control. (And, many have recently commented that this greater truth, almost four years after our own economy crashed and burned due to similar reasons—risky derivatives trading, counterparty calls, etc.--is the biggest travesty of all.)
From Paul Krugman, on Monday…
…Now the truth is coming out. That multibillion-dollar loss wasn’t an isolated event; it was an accident waiting to happen. For even as Mr. Dimon was giving speeches about responsible banking, his own institution was heaping on the risk. “The unit at the center of JPMorgan’s $2 billion trading loss,” reports The Financial Times, “has built up positions totaling more than $100 billion in asset-backed securities and structured products — the complex, risky bonds at the center of the financial crisis in 2008. These holdings are in addition to those in credit derivatives which led to the losses.”
Key point(s) here:
And what was going on as these positions were being accumulated? According to a fascinating report in Sunday’s Times, the reality behind JPMorgan’s facade of competence was a scene all too reminiscent of the behavior that brought down firms like A.I.G. in 2008: arrogant executives shouting down anyone who tried to question their activities, top management that didn’t ask questions as long as the money kept rolling in. It really is déjà vu all over again.
The point, again, is that an institution like JPMorgan — a too-big-to-fail bank, not to mention a bank whose deposits are already guaranteed by U.S. taxpayers — shouldn’t be engaged in this kind of speculative investment at all. And that’s why we need a return to much stronger financial regulation, stronger even than the Dodd-Frank regulations passed back in 2010…
Based upon a myriad of published reports over the past couple of weeks (see the linked stories, above), we already know that JP Morgan Chase’s overall market exposure
in their CIO office—ALONE—is not $100 billion, but approximately $400 billion. And, concerns are being voiced—from virtually all corners, and as confirmed herein--that the Iksil “whale” story is merely the tip of this banking Titanic’s iceberg.
Where Do JPMorgan’s Losses Stop? Nobody--Except For Maybe A Few Bank And Market Insiders—Really Knows!
Here are links to two of what (I’m told, and I agree) are considered by many to be the “best” pieces written on this debacle in the MSM, to date: “How JPMorgan’s storm in a teapot grew,” by Tracy Alloway and Sam Jones, Financial Times, May 16, 2012 (8:01PM) and, “J.P. Morgan Struggles to Unwind Huge Bets,” by Gregory Zuckerman and Scott Patterson, Wall Street Journal blog (wsj.com), May 18, 2012 (8:02PM).
From The Financial Times:
…Last week Mr Dimon revealed the $2bn mark-to-market loss and said that a key risk management model in the CIO had been “inadequate.”
(Bold type is diarist’s emphasis. You might want to read that bold sentence, above, a second time, too. Journalists Zuckerman and Patterson are widely respected, and the FT is, at least to some extent, quickly replacing the Wall Street Journal in terms of maintaining the best street cred on the securities markets in the MSM.)
Even now, the magnitude of JPMorgan’s loss remains something of a mystery to hedge funds. [Diarist’s Note: I explain why, at least in part, just a little farther down.] There are rumours that Mr Iksil’s positions may be masking other losses elsewhere within the CIO.
Meanwhile, the hedge that went spectacularly wrong has become something of an epic tale for hedge fund managers. One said: “It wasn’t just a giant whale, it was the size of the Atlantic Ocean.”
And, from WSJ.com:
…The nation's largest bank has said publicly that its losses on the trades have surpassed $2 billion, and people familiar with the matter have said they could over time reach $5 billion.
But the losses could be even bigger if the company sells its positions into a market that has turned against its positions, some traders say. Improvements in the markets could slice the bank's losses…
…J.P. Morgan's decision to move slowly in unwinding the positions highlights a painful dilemma for the company and Chief Executive James Dimon: The bank can move slowly and risk being bled by small but regular losses over time, or it can attempt to close out the trades sooner but face potentially larger losses. Moving slowly also holds risks if the market turns sharply against the bank in the near term…
The folks at wsj.com tell us that JPMC controls roughly $100 billion of the total $785 billion on that entire/particular index, one which tracks the health of approximately 120 U.S. corporation’s debt. “These wagers include long and short positions, or bets that index will either rise or fall, from various parts of the firm.”
…J.P. Morgan's chief investment office, which racked up the trading losses, is believed by traders to be mostly long this index. Thus, if nervousness increases about the credit-worthiness of the investment-grade- rated companies making up the index, the bank's overall losses would likely grow, say people familiar with the matter.
(Bold type is diarist’s emphasis.)
J.P. Morgan's situation is complicated by the fact that it controls a big percentage of the outstanding trades on the index. According to data from IntercontinentalExchange Inc., which operates a clearinghouse for credit derivatives, positions on the index amount to about $785 billion. [Diarist’s Note: That figure doesn't reflect all trading activity in the index because many/most “custom” derivative trades aren't put through a clearinghouse; they’re done “off-exchange.”] Any move by J.P. Morgan to sell positions could further drive down their value, traders say…
A quick read of the Intercontinental Exchange’s (“ICE”) Wiki page, and something of which, due to my writing, I’ve been aware for over three years, is the basic reality that JPMC is one of the principal owners of the ICE derivatives exchange, and per the Wiki…
On March 4, 2009, ICE announced that ICE US Trust, LLC (ICE Trust), a New York limited liability trust company, received regulatory approval from the Board of Governors of the Federal Reserve System to become a member of the Federal Reserve System and to serve as a clearing house and central counterparty for credit default swap (CDS) transactions, initially for North American CDS indexes and later adding liquid single-name swaps. Now known as ICE Clear Credit LLC it is subject to direct regulation and supervision by the CFTC and the SEC.
In December, 2010, The New York Times fielded a substantial examination of the Trust and its members, saying in part "the details of their meetings, even their identities, have been strictly confidential. Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives ... [and also] share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance," a system with "costly implications" for customers and smaller banks. "The marketplace as it functions now 'adds up to higher costs to all Americans,' said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said." In the same month, ICE said it was "well positioned" to establish a Swap Execution Facility (SEF), having met with Commissioner Gensler or his staff four times in the past year to discuss SEF registration. An SEF or multiple SEFs will be the derivatives-trading platform(s) newly required under Dodd-Frank financial-markets reform. Other firms said to be looking at becoming SEFs were Bloomberg LP, Thomson TradeWeb, Parity Energy , and MarketAxess. In a call with investors on November 1, CEO Sprecher had discussed the company's position in and preparation across its numerous markets, including the prospects for SEFs.
In “other” words: JPMC. Goldman, Morgan Stanley, and a few others own and run
the exchanges upon which they trade derivatives; many and/or the majority of their derivatives trades—the “custom” contracts--aren’t even listed on the exchange; and, reiterating (see bold type in the blockquote, above), as far as the ICE Trust and its members are concerned: "…the details of their meetings, even their identities, have been strictly confidential. Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives ... [and also] share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance."
Adding insult to injury, the government entities responsible (the SEC and the CFTC) for overseeing the derivatives industry RELY upon the ICE Trust to provide them with the data that’s necessary for the regulators to, supposedly, do their jobs. (And, again, that data’s provided only for a subset of derivatives trades—the ones that actually are reported on the ICE Exchange.)
So, at the end of the day, since virtually all of the news coverage about this story fails to point out these incredibly inconvenient facts (i.e.: the banks “regulate” themselves, for all intents and purposes, since our government regulators rely upon the information these exchanges provide as “fact”). But, at least the MSM is acknowledging (see above) that no one (outside of key industry players) really knows most of what’s going on as it relates to the lion’s share of the derivatives trading marketplace, in the first place!
The unstated truth here is that, today, almost four years after Bear Stearns, Lehman Brothers and AIG imploded, it’s business as usual in the derivatives industry, and Dodd-Frank has had virtually NO impact upon these matters--and virtually the entire derivatives industry--at all.
So, it’s easy to understand why…
“The Chase Is On!”
Add JPMC’s rapidly-expanding river of red ink on this deal to Massachusetts Democratic Senate candidate Elizabeth Warren’s and Treasury Secretary Tim Geithner’s -- along with a slew of other folks – calls for Jamie Dimon to resign from the Board of the Federal Reserve Bank of New York, and it becomes a direct attack on the ego of the most vaunted of those “savvy businessman” that President Obama was talking about a couple of years back.
With the Securities and Exchange Commission, the Federal Bureau of Investigation, the US Department of Justice, the UK’s Financial Services Authority and, now, the Commodities Futures Trading Commission breathing down the bank’s neck, it’s safe to say that, as the bank’s renowned ad campaign from the early 80’s reminds us: “The Chase Is On!” Heh.
(Lovin’ that dated disco music this past week. R.I.P. Donna Summer and Robin Gibb.)
Please remember this over-arching fact: any one of these stories, above, could quickly morph into major nightmares for JPMC, if they haven't already, as you learn even more details and disturbing truths about JPMC’s risk management in Part II of this post, linked HERE.
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For more interesting tidbits and facts about JPMorgan Chase, I'd also suggest a read of this post from Jesse's Crossroads Cafe, from Tuesday: "William Black on JP Morgan and the Failure to Regulate Wall Street Fraud."
And, this highly-annotated post from George Washington's blog: "The Truth About JP Morgan's $2 Billion Loss," May 15, 2012.
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Again, Part II of this post is entitled: "“WhaleMu–JP Morgan’s Next Surprise?" by Michael Olenick (Part II of II)."