One of our faithful followers, David, has asked for our opinion on Jamie Dimon and Chase. At first it looked like the loss would not be large as $2 billion which is not big when you are dealing with a bank the size of Chase. However, as days have gone by and the problems in Europe have gotten worse, we are hearing loss numbers in the $6-7 Billion region. With that development, we are starting to get into some serious money as the following story illustrates.
As its losses increased and its stock price decreases, Chase is getting hit with a double whammy that although we doubt that it will endanger the bank, will hurt it. The loss of $6-7 would nearly wipe out all its profits for the past year and the loss of valuation would make the impact much bigger than it was a week or so ago.
Will Chase require an infusion of capital? That is to be seen. Should Spain and Greece fail to live up to expectations and should France void its agreement with the Germans in relation to austerity, we could see losses increase dramatically.
Should we infuse capital, is the next question. That will be the toughest question that the Obama Administration will face in the upcoming months. If the choice is to let Chase fall, Obama will be faced with letting a major financial company fail. On the other hand, if Chase gets a bailout, the American people will not vote for him. The President will be in a tough spot.
We believe that the Administration should follow the second course. It is not advisable to continue to allow banks and other companies to take irresponsible risks without having to pay the ultimate penalty--bankruptcy. Regardless of the resulting damage to the country, in the short run, the damage which comes from continuing to prop up companies who take these chances without a penalty will be much greater.
Jamie Dimon might be the "smartest banker in the US," but on this one, it looks like he blew it. It is time for those in the boardroom to know that when a company makes bad bets, it might pay with the company's life. Without the ultimate fear, the necessary precautions that good corporate governance requires, go out the window and we will continue to have these type of stories year after year. It is time for bad, risky decisions to go the way of the buggy whip and return to a time when banking was conservative and took reasonable risk.
Conservative Tom
JPMorgan Chase loss only going to get worse
@CNNMoneyInvest May 20, 2012: 8:50 PM ET
An overall drop in the market is exacerbating JPMorgan's losses tied to its bets on corporate bonds.
NEW YORK (CNNMoney) -- One thing seems clear about JPMorgan Chase's $2 billion loss. It's no longer $2 billion. It's likely much higher.
The number being bandied about now is closer to a range of $6 billion to $7 billion, according to several people working on trading desks that specialize in the derivatives JPMorgan Chase (JPM, Fortune 500) used to make its trades and from two sources with knowledge of the bank's positions.
JPMorgan Chase declined to comment on its trading activities. Of course, it is impossible to know with absolute certainty just how high the losses are at any given moment.
But experts said there are few scenarios in which hedge funds on the other side of the bank's giant bet will let JPMorgan Chase out of it without significantly more pain.
"The market knows roughly what [JPMorgan] has and what the sizes are," said a source with knowledge of the bank's positions.
Why have the losses grown since chief executive officer Jamie Dimon informed the public of them? The market's overall slide hasn't helped.
Since last Thursday, the U.S. and European stock markets have dropped significantly. The S&P 500 (SPX) is down roughly 3.5%, and the main European indexes are down between 4% and 6%.
JPMorgan Chase's trades were built around contracts tied to corporate bonds. Specifically, JPMorgan Chase sold huge amounts of protection on an index of 125 highly rated corporate bonds. Simply put, JPMorgan Chase's massive trade stood a better chance to pay off if the market had continued to rally.
Now as the overall market has worsened, it costs even more for JPMorgan Chase to sell protection against possible bankruptcies on corporate bonds.
Since JPMorgan Chase is basically the only one on its side of the bet, a worsening market makes it even more expensive to keep this position and more difficult to find other places to offset these losses.
JPMorgan Chase's main bet has been on an index, known as IG9, of 125 U.S. investment grade companies. Shares of three of the 125 companies -- retailer J.C. Penney (JCP, Fortune 500) and insurers MBIA (MBI) and Radian (RDN) -- have taken big hits since last week, driving up the cost of offering protection against a default.
Additionally, since Dimon's announcement, more hedge funds have piled into the index, further driving up the cost of selling protection.
It's clear from public data filed with The Depository Trust & Clearing Corporation that JPMorgan Chase hasn't sold any of its positions yet. The DTCC tracks trading activity and sizes of positions on the IG9 and other indexes, and there haven't been any big moves since last week.
"Whatever the size was, it's clearly not something that you can call one or two dealers and sell," said Garth Friesen, a co-chief investment officer at AVM, a derivatives hedge fund that's not involved in these trades.
As soon as it becomes clear that JPMorgan Chase is unwinding its position, it will be obvious to players on every major trading desk. Hedge funds will immediately start piling into that index and buying protection, driving up the bank's losses.
Until then, it won't cost the hedge funds much to sit and wait.
"There will be a stare-fest between the hedge funds and JPMorgan," said James Rickards, former general counsel at Long-Term Capital Management, a hedge fund that required a $3.6 billion bailout from the Federal Reserve because of its massive losses from its trading activities.
"It will cost JPMorgan an unimaginable fortune to push the spread back in their direction," he added.
But JPMorgan Chase may blink first. It could face pressure from U.S. government regulators to start selling some of its positions.
Both the Securities and Exchange Commission and the Federal Bureau of Investigation are looking into JPMorgan's trade. Dimon has also been called to testify before the Senate Banking Committee.
The bank's shareholders may grow increasingly anxious as well, which could force JPMorgan Chase's hand. Shares are down 18% nearly since the company announced the loss.
"It's not just a battle between Dimon and the hedge funds," said Rickards. "It's been JPMorgan and the regulators, the FBI, Congressional committees and stock holders. It's not clear that their tolerance for pain will be as high as Jamie Dimon."
For now, the one thing working in JPMorgan Chase's favor is the market's bet that the bank is too big too fail, making it dangerous to push too hard on the other side of its trade.
But the dangers are far greater for JPMorgan Chase.
"Part of the problem of what they were doing is that they were too big in the trade to ever be able to trade out of it," said Friesen, who is also a member of the Federal Reserve Bank of New York's advisory group 
I have been learning some of the garbage Morgan Stanley did to fraud some large retail brokerage firms out of tens of billions of dollars on the Facebook IPO (the worst performing IPO ever in its first week on the market). Lawsuits have already been filed on this. Operating on insider information that Facebook earnings will be lower than publicly forecast by their analysts, as the leading underwriter for the IPO, Morgan Stanley could see that they were going to lose their arse on this deal when the word got out to retail investors. So they issued what is called "greenshoe options." This allows them to create (in effect) more shares than originally issued and then short-sell this stock, which forces unsuspecting retail investors to pay them the full initial IPO price (about $38) when the price quickly dropped to $31.
ReplyDeleteI mention this as just one more example of why Occupy Wall Street will be necessary until the federal government actually does something to stop these crooks. Fines and lawsuits don't work. Some Wall Street CEOs need to go to prison.
--David
Morgan Stanley definitely will pay the price, however, Occupy is not the way, they are not the people that should be punishing. We need the system to work which means fines, penalties and yes, jail time.
ReplyDeleteIf this does not have someone go to jail, I would agree, the system is broken. Everyone who has ever been associated with selling equities knows that you need to completely release all the information to everyone, otherwise it is "inside" information for which you go to jail ala Martha Stewart.