Archive - Jul 13, 2012

For those strapped for time, here are the key charts from the numerous JPM slidepacks just released.

With record low Treasury yields it is clear that the bond markets think we are about to embark upon a difficult journey while the equity markets are still regaling in the quarters past. The bond markets have read the charts and looked at the weather ahead more correctly he fears and the length of our European journey changes nothing about the difficulty of the upcoming passage. Having been asked so many times and by so many people over the last couple of years how to fix Europe that the question is now commonplace in Grant's thinking, here is the must-read reality short version. The main issues bended about in a number of significant ways would be the total and uncompromising loss of all of the nations’ sovereign status. There would be virtually no more Spain, France, Italy et al. Every nation and their cost of funding and their standard of living would have to merge at some average or mean. So we ask Europe; are you prepared for this? Do you want this? Are you willing to pay the price for this because if you are not then we suggest you end the charade and protect your own interests before you fall down the rabbit hole that you have created by your own political and economic deceit!
 

A near-record single-day plunge in rates for Switzerland's 2Y interest rate has driven it to a spectacular -43.1bps this morning. The German 2Y also has cracked to record low interest rates at -5.2bps. With Gold big over $1585 also, it seems the safety trade - or escape from risk as JPM exposes the reality of the world in which we live - is dramatically on.

When fraud has been exposed, one is best advised to baffle everyone with lots and lots of data, figures, numbers, and generally meaningless information overflow. Sure enough, as part of the Q2 earnings call, JPM has released a record 8 pdfs to go alongside Jamie Dimon sounding very confident, and pretending he knows what he is talking about. Remember: when in doubt, baffle them with bullshit.

As readers enjoy JPM squirm his way through the JPM conference call (webcast live) explaining how it is that he not only was fooled by the CIO traders to the tune of billions, but more importantly to mismark hundreds of billions in CDS over the years, here is some delightful irony: "The J.P.Morgan Guide To Credit Derivatives" By Blythe Masters. Because it is truly ironic that the firm which created CDS will be the one responsible for destroying them.

In light of the just announced huge 8-K which has JPM admitting it was mismarking hundreds of billions in CDS, in effect destroying the CDS market for everyone (as we predicted 2 months ago would happen), the firm's earnings (and CIO losses) are very much irrelevant. But here they are regardless: $5 billion in Net Income, which includes a $4.4 billion in CIO losses offset by $1.0 billion from "securities gain in CIO investment securities" i.e., asset sales; also in Q2, the firm took a $2.1 billion "benefit" from reducing loan loss reserves (the usual accounting gimmick), and $0.8 billion DVA "profit" as a result of its CDS blowing up. Finally JPM also announced $0.5 billion gain on a "Bear Stearns related first loss note." In summary, expectations were for $0.76 in EPS; reported EPS Ex-DVA were $1.09, and ex-all one time gains, $0.67. In other words, JPM's bottom line is totally meaningless, as the bulk of profits are from totally garbage and meaningless numbers. The real question is how much net income is now forever gone as a result of i) the unwind of the CIO's synthetic division, aka the most profitable group at JPM, and ii) the fact that the entire firm's CDS marks were made up and will now have to reflect reality. Now, back to the main news of the day: the fact that JPM just threw the entire CDS market under the bus, and England's Lieborgate just arrived in the US courtesy of CDS-gate.

My Libor story

Back on May 30 we wrote "The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps" in which we made it abundantly clear that due to the Over The Counter nature of CDS one can easily make up whatever marks one wants in order to boost the P&L impact of a given position, this is precisely  what JPM was doing in order to boost its P&L? As of moments ago this too has been proven to be the case. From a just filed very shocking 8K which takes the "Whale" saga to a whole new level. To wit: 'the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the Firm is no longer confident that the trader marks used to prepare the Firm's reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end."

As JP Morgan prepares to report how much the blow up of its CDS in Q2 "boosted" earnings, not to mention how much "improving" conditions forced it to reduce loss reserves, the WSJ reports that the rest of "whale team", or those responsible for the CIO's $5 billion loss, have left the firm.