11th May 2012
Last night we received yet more confirmation that there is something rotten in the world’s banking industry and added to it was the reminder that problems spread beyond the Euro zone. The American bank JP Morgan hastily arranged a conference call and such matters send a chill down the spine as good news is not spread hastily. Even before the call began my thoughts turned to the Chief Investment Office of the bank which places very large trades and under the leadership of Bruno Iskil has become known as the London Whale.
Rumous have been swirling about problems at the London Whale for some time but had been officially denied. Cue Sir Humphrey Appleby:
Never believe anything until it is officially denied
Indeed the bank’s Chief Executive Officer Jamie Dimon had also been mounting something of a campaign in recent times to convince us that JP Morgan did not engage in proprietary trading and that anyway it was low risk. For example he told Fox News this in January that "proprietary trading had very little to do with the financial crisis"
Indeed Jamie Dimon has also been a vociferous critic of the Volcker Rules for banking- which I support- telling Fox News "Paul Volcker by his own admission has said he doesn’t understand capital markets. He has proven that to me."
Indeed last month the University of Rochester gave Jamie Dimon an executive of the year award and in return he said this: "We have the widest, deepest and most transparent capital markets in the world. Why the hell are we so depressed?"
And added, according to Forbes, his view of attacks on JP Morgan: "That’s just another form of discrimination".
So as you can see in an example of hubris JP Morgan had set itself up for a fall.
What was announced?
The conference call found Jamie Dimon in uncharacteristically humble mode:
"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."
Odd you might think for something Mr.Dimon had previously called "a tempest in a teapot"
Let us think of a hedge which is “riskier,more volatile and less effective”. As we do we realise that ex post it was not a hedge and we wonder if ex ante it was never intended to be and Mr.Dimon is trying to pull the wool over our eyes! This is significant for a bank which has consistently claimed to be a hedger rather than a “punter” or trader. Perhaps another definition for my financial lexicon.
Okay how much has this cost?
As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.
The actual loss has now reduced to approximately US $2 billion according to Mr.Dimon. If I was a shareholder of JP Morgan’s I would be very concerned by this. Apparently when large losses exist they are denied and they only get told about the situation when it has improved. And Mr.Dimon’s word is of low value when it is plain that at best he has misrepresented the situation both strategically about JP Morgan’s activities and tactically about the London Whale itself. Shareholders may also do well to mull the consequences of this part of the statement:
Accordingly, net income in Corporate likely will be more volatile in future periods than it has been in the past
You see the word “volatile” doesn’t mean profits as according to their financial lexicon of these times they are considered to be both permanent and stable. It is losses which are temporary and “volatile” even if they persist for a very long time. And if we refer to the conference call itself they may have concerns as to how long “a little bit” can last for: "It could get worse. This could go on for a little bit"
Also there are issues here for central bankers and this comes with a background that Jamie Dimon has been known for doing his best to bully and browbeat them. As this is an American bank with this part of its operation being based in London,hence its name, both the US Federal Reserve and the Bank of England should have been all over this like a rash. The main role should be for the Federal Reserve as it is after all US taxpayers who provided an implicit guarantee and backstop for JP Morgan’s activities. If I was in charge of the US Federal Reserve Mr.Dimon would have been taking quite a few calls from me recently.
Sometimes you just have to have a wry smile
Only this week JP Morgan has released this about its new Trade Status Dashboard (H/T Creditplumber).
With this new tool, clients can quickly identify the status of trades within one user-friendly format, helping them to make informed decisions and improve risk management.
I guess they will now be fielding more than a few enquiries as to whether they use it themselves! And they will be finding out whether Dr.Goebbels was right in his claim that all publicity is good publicity.
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