An Independent Look into JP Morgan

Reggie Middleton's picture

The JP Morgan forensic preview is now available. Remember, this is
not subscription material, but a "public preview" of the material to
come. I thought non-subscribers would be interested in knowing what my
opinion of the country's most respected bank was. There is some
interesting stuff here, and the subscription analysis will have even
more (in terms of data, analysis and valuation). As we have all been
aware, the markets have been totally ignoring valuation for about two
quarters now. It remains to be seen how long that continues.

Click graph to enlarge


 Cute graphic above, eh? There is plenty of this in the public preview.
When considering the staggering level of derivatives employed by JPM,
it is frightening to even consider the fact that the
quality of JPM's derivative exposure is even worse than Bear Stearns
and Lehman‘s derivative portfolio just prior to their fall.

Total net derivative exposure rated below BBB and below for JP Morgan
currently stands at 35.4% while the same stood at 17.0% for Bear
Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know
what happened to Bear Stearns and Lehman Brothers, don't we??? I warned
all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?":
On February 20th, 2008) months before their collapse by taking a close,
unbiased look at their balance sheet. Both of these companies were
rated investment grade at the time, just like "you know  who". Now, I
am not saying JPM is about to collapse, since it is one of the anointed
ones chosen by the government and guaranteed not to fail - unlike Bear
Stearns and Lehman Brothers, and it is (after all) investment grade
rated. Who would you put your faith in, the big ratings agencies or
your favorite blogger? Then again, if it acts like a duck, walks like a
duck, and quacks like a duck, is it a chicken??? I'll leave the rest up
for my readers to decide. 

This public preview is the
culmination of several investigative posts that I have made that have
led me to look more closely into the big money center banks. It all
started with a hunch that JPM wasn't marking their WaMu portfolio
acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful!
), which would very well have rendered them insolvent - particularly if
that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent).
I then posted the following series, which eventually led to me finally
breaking down and performing a full forensic analysis of JP Morgan,
instead of piece-mealing it with anecdotal analysis. 

  1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
  2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
  3. As the markets climb on top of one big, incestuous pool of concentrated risk...
  4. Any objective review shows that the big banks are simply too big for the safety of this country
  5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

You can download the public preview here. If you find it to be of
interest or insightful, feel free to distribute it (intact) as you

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb 

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Anonymous's picture

Reggie -- Great article, Reggie, but I am left with one question, the implications of which I would need to understand, before I can accept your conclusions: It seems to me the main threat to JPM's future, according to your thesis, is that it is holding an enormous inventory of risky derivatives. But all derivatives have expiration dates. It seems to me that the Fed/Treasury/JPM would try to work a strategy that would keep the bubble inflated until the clock ran out on those derivatives, after which that risk would evaporate and JPM would be out of the woods again. Now surely JPM will continue to write derivatives in order to make a profit, but wouldn't you assume that JPM, given what they've learned from the past, be much more conservative about the risks they will take on future contracts than they were in the past. Aren't they and the Fed just holding their breath, hoping for the clock to run out, so that all of this can be put behind them? Do you have intimate knowledge of when such contracts will expire or do you think my question is irrelevant? Thanks for your good work, Reggie. I appreciate it.

JR's picture

Reggie, the background scenario of derivatives, as I know you're acquainted with but the public isn't, is what should worry us all and your chart puts the worry on paper. I know you said, “Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail…," but, IMHO, JPMorgan has to go before it pulls us all in.   

It was back in October of 2008 that Nouriel Roubini said the bailout package wasn't going to do the trick during a Roubini/Ritholtz Conference Call organized by RiskMetrics. Roubini surmised then that nobody trusted anybody any more, and that “We’ve reached the point where $700 billion doesn’t make any difference given reaction of the market.”  Looking at your chart, $700 billion didn’t make much difference and what began as the $700-billion Troubled Asset Relief Program (TARP) could potentially reach a liability of $23.7 trillion for U.S. taxpayers--compared to the U.S. gross domestic product of $14 trillion, according to Neil Barofsky, special inspector general of the TARP program.

John Pugsley in a mailing from the Sovereign Society in 2006 said that the derivatives time bomb would "vaporize" wealth and predicted it as "the final unraveling of the U.S. economy..." He said at the time that nearly one third of these derivatives were concentrated in the hands of just three banks: JP Morgan Chase, Citigroup and Bank of America  -- with those three banks alone in 2005 accounting for a “mind-bending $91 trillion of the global derivatives market.”   Pugsley said the global derivatives market in 1986 was just over $1 trillion, reaching $372 trillion by 2005—more than 7 times the entire global economy.

Pugsley pointed out then that this "Phantom Economy" was "20 times the size of the U.S. economy." from which a small group of private investors had already "reaped gains of up to 1,794%.”

He further noted in 2006: “Derivatives have been at the core of almost every major economic disaster since 1987.  They were responsible for Black Monday.  They were behind the Asian crisis, the LTCM hedge fund disaster, the fall of Barings Bank, the bankruptcy of Orange County, and the collapse of Enron and Argentina…”

He quoted Ben Bernanke as saying “certainly, derivatives instruments pose challenges to risk managers and to supervisors, but these risks are manageable and thus far have been managed quite well.”  In fact, said Pugsley, “Bernanke said that derivatives are good for the economy, making the U.S. economy resilient to risk.”

Debt Rattle September 5, 2008 in Cement Feet wrote: ”The total amount of outstanding derivatives in the world economy has reached a guesstimated $800 trillion, about 15-20 times the annual world GDP. Much of it has been financed through the yen carry trade.”

Zero Hedge on July 28, 2009, said Fitch had confirmed its recent disclosure of data that financial companies hold 99.7% of all derivative contracts and that a subset of just five companies account for an “overwhelming majority” of derivative assets and liabilities.

“The companies in question (Total Notional Derivatives: Assets & Liabilities, $ in Trillions): JP Morgan:$81.7; Bank of America:$80.0; Citigroup:$31.5; Morgan Stanley:$39.3, and of course Goldman Sachs: $47.8 (this is an OCC estimate: Goldman has not disclosed notional amounts in their derivative book, only # of contracts)."

Looking at your chart, I contend that the current handling of this $800 trillion derivatives time bomb by the Fed and Obama Administration, requiring Americans to foot the bill through taxation, inflation and going trillions deeper into debt off an annual GDP of $14 trillion as unemployment hits GD levels, could be the erroneous move that, as Pugsley put it, “blows these banks’ delicately balanced derivatives portfolios off their axis and spins world markets into an unprecedented collapse.” 

Or has it already begun? Frankly, Reggie, your chart boggles the mind.

Anonymous's picture

Gosh - i thought Lehman and Bear went bust because the hedge funds were withdrawing funds while they were naked shorting their stock. Remember this is a game to the big boys and the winners take all.

Ich bin ein whatever's picture

I'm very glad to see Reggie at Zero Hedge.

I've been reading his articles posted at Safe Haven, and he has done an extensive amount of research on the banks. 

I enjoy your work, Reggie, and I'm glad to see that you've made your way to this site.


Unscarred's picture

If GS is "The Great Vampire Squid," does that make JPM "Moby Dick?"

Reggie Middleton's picture

"Look bottom line, JPM has a massive derivative book, but to make comments about it being 10 times the US GDP etc is totally misleading.  What really screwed Lehman and Bear was they used these SIVS to take more leverage than there balancesheet would allow and when they suddenly came back on balancesheet, it was game over."

I don't rememer saying JPM would go bust, but if Uncle Sam and his deprived step child, the US taxpayer didn't have their back....

Hmmm! JPM and off balance sheet entities... You know what grandma use to say. There is very rarely only one roach!

skippy's picture

Funny things happen when you mix up your live and blank ammo in the dark, the boys at the night fire range can't hit shit and the guys doing field exercises, yelling your dead Mother f$@# only too realize momments later, they really are.

Followed by face saving exercise by the brass attempting in finding the chump doling out said ammo and not what star lit the fuse under his ass to get a hurry on lol...war to win and all.

Skippy...effective blast range of SIVS/MOAB your entire valley.


estaog's picture

You need to get back on the meds

NRGTDR's picture

Hi Reggie,

I came across this piece of information last year in my research and its implications are deeply disturbing to me...I knew last year JPM was financial WMD waiting to go off...and it amazed me, especially after my puts expired worthless, that their share price continued to climb...I knew something was fishy....well Kirby covered it again back in June:

"President George W. Bush has bestowed on his [then] intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye."

What this means folks, if institutions like J.P. Morgan are deemed to be integral to U.S. National Security - they could be "legally" excused from reporting their true financial condition.

Credit Source: Financial Sense

The Bush Doctrine, Economic
Warfare and Your Investment Portfolio

by Rob Kirby | June 12, 2009

I am sure GS falls under this as well.


Cheers and keep up the solid work.



JR's picture

As G. Edward Griffin states, the name of the Fed game is bailout.

The question is, will this short-run nationalization of the financial industry to socialize its losses and privatize its gains by massive counterfeiting and misallocation of the currency cause long-term calamity for the nation, hobbling the wealth-creation mechanisms of capitalism and the future of liberty

Letting Goldman Sachs and JPMorgan determine all actions of the Federal Reserve and Treasury and continue to transfer their gambling debts to the taxpayers where the real costs are clearly running into the high trillions, is sheer lunacy for the health of the nation and her people.

As economics instructor Don A. Rich wrote in September 2008 for The Ludwig von Mises Institute .

“The world economy has just been subjected by its central bankers (including Bernanke as vice chair under Greenspan and encouraged by Paulson at Goldman Sachs) to the largest credit bubble in history…

“[W]e have allowed our monetary, fiscal, and regulatory authorities to lure us like lambs to the slaughter to the unwarranted socialization of the most important sector of the capitalist system.”

A free people cannot afford Goldman Sachs and JP Morgan; America is Too Big to Fail.

Raymond Shaw's picture

Reggie!  Finally, I was anticipating this moment for months.  Nice to have you over here at Zero Hedge.  Thank you for this nice post.

Anonymous's picture

This is more proof that ZH exists to help those who help themselves, have an ear to hear, etc. Reggie, your video stroll through Brooklyn was jaw dropping, and your analysis is like a sharp sword. Glad to see the truth tellers coalescing.

Anonymous's picture

Terrible article displaying the lack of insight or analysis which characterises reggie middleton's work.

Haven't people learned that gross derivative notionals are irrelevant?

MsCreant's picture

Ya know, I don't know this guy at all, but I look at who likes and welcomes him, then I look at your anonymouse posting self putting his post down, without anything to defend his/her position, and then I gotta go hmmm...

Do you think all the derivatives will zero out peacefully?

His chart was simple and direct. He could have picked other things besides GDP to make the point, but GDP is where earnings come from. That is how you pay stuff back, with earnings.

Think I'll listen with interest when this guy posts (though I will admit the commercial aspect turned me off for a second, sounds like he won't be offended by my saying that).

Welcome Reggie

Booo coward Anonymouse 97611

Veteran's picture

Great stuff, thanks for the post!  I hate Chase and the sooner they blow up the better

gjervis's picture

Glad you are on this Reggie, looking forward to more posts although i simply go straight to your site daily for updates.

Reggie Middleton's picture

Yes, there is a typo - Billion should be Trillion with a "t"

Anonymous's picture

Shows the care and attention you put into your analysis.

I'm being sarcastic in case anyone didn't pick up on that.

Reggie Middleton's picture

"What is the source for saying that 35% of  JPMorgan derivitives are BBB and below?"

Their balance sheet, where many an analyst and investor fear to tread!!!

A Man without Qualities's picture

The main reason for this is that the proportion of counterparties with CSAs is lower for lower ratings.  The net MTM does not easily allow calculation of the quantum of risk, as the tenor of the trades is liable to be shorter.


Further, a good chunk of these trades will be USD ir swaps linked to LBOs etc, with floating loans swapped to fixed, so as rates have collapsed, the mtm is therefore higher, which will be heavily concentrated in lower rated counterparties which cannot enter into CSAs as they don't have the cash.


Comparing to Bear or Lehman is all well and good, but there is a balance sheet here.  The mtm of these 35% was $50bn at year end 2008, so assuming a 20% loss (ie very conservative) would represent a $10bn loss even without hedges and they will be hedging both the market and the credit risk....


Look bottom line, JPM has a massive derivative book, but to make comments about it being 10 times the US GDP etc is totally misleading.  What really screwed Lehman and Bear was they used these SIVS to take more leverage than there balancesheet would allow and when they suddenly came back on balancesheet, it was game over.   


As for JPMorgan, love them or loath them, but the only reason they will go into default is if Uncle Sam itself does, and even then, maybe not.

Anonymous's picture

So basically what you are saying is, JP Morgan is a sound bank with proper leverage and loss reserves?

panda6's picture

Very good analysis sir.


I expect most of the chimps on this site will ignore it as they usually do :-)

Anonymous's picture

not to undermine your graph, but to point out that you are comparing stock values vs flow values. That is, if, of course, we can consider the notional amount of derivatives a stock of some sorts...

Anonymous's picture

Count me among those very glad to see Reggie at ZH.

Careless Whisper's picture

What is the source for saying that 35% of  JPMorgan derivitives are BBB and below?


Anonymous's picture




estaog's picture

Which charts are you looking at exactly?

mr brincq's picture

Reggie, in your graph you mention that JPM outstrips the entire world's economy by $21 billion....should that not be 21 trillion?

Anonymous's picture

brooklyn boy in the house!

still hoping for that cage match between Boom Bust Reggie & the Queen of Dimon on a barge in Newtown Creek (sponsored by Exxon of course) to settle the inter-boro rivalry once and for all.

go get em Reg.

Gilgamesh's picture

Good to see you contribute this Reggie.  Like Miles (Layne), I am a frequent reader.  Always appreciate your research and analysis.  And, as they say, timing is everything. 

Also, if you haven't seen some of the comments here, Wells is of a little interest from a few.

Anonymous's picture

bas bac, its bac!!!

Anonymous's picture

hey look gordo. reggie is here on zerohedge. i feel safe now....

Reggie Middleton's picture

Well, thank you Kendig. I am also a big fan of ZH! Just so all know, I am "commerical" by mistake. I use to give all of my content away for free after I have made use of it, but it simply got too expensive and time consuming. I am sure the folks over at ZH can sympathize. I also realized that it is very, very important to get the work out thus I will continue to (and hopefully always) blog and offer substantial analysis and opinion for free.

To commemorate my entrance onto ZeroHedge, I will be delivering the name of a bank that is currently doing the "AIG" (as in naked swap writing) very soon.

Anonymous's picture

"Welcome to the party pal", great to see you here Reggie.

JOHNICON's picture

I could end up sounding like an idiot, but I'm betting its Wells Fargo.  I don't know why I think that, I just do.  It's good to see you on here, Reggie.  I've always enjoyed reading your views since back in the winter of '08.

Hephasteus's picture

Hi reggie. Love you're bank analysis. Can't wait to see the AIG article.

Miles Kendig's picture

Great tease.  Although I wonder if that particular list has only one name on it. 

Miles Kendig's picture

As a reader of both Reggie's site and ZH I am fortunate to see the cross pollination. I hope that if I am  among the few that have been reading both that the list increases.  Over time I have found Reggie's work quite readable, timely and prescient as is this bit of work.  While Reggie is definitely commercial and approaches his commentary with the two clearly commingled folks here know my view on being commercial while having something worthwhile to say.


Anonymous's picture

I have some worrying concerns for the US. What if JPM is also dealing with themselves?
How does the IRS ever audit JPM?
In derivatives, I believe profit can be whatever you want it to be, same with leverage. All you need is good financial enginers. JPM are probably the best.
Who does JPM answer to? Where is the control/transparency?
Has JPM turned the financial world into there personal ponzi scheme? They seem to be untouchable, especially in the US.
Has JPM highjacked US democracy and capitalism? Jury is still out. Terry.(Australia)

Bearish Spirits's picture

Agreed.  It's great to see Reggie on ZH, and in such volume!  The list of outstanding contributors continues to grow...

ghostfaceinvestah's picture

I third that, Reggie does great work.

Anonymous's picture

Fourth. Great to see you hear Reggie