JPM Securities Converts From Corporation To LLC, As Chris Whalen Discusses Why Prop May Contribute Far More To JPM's Top Line
Update from Chris Whalen: "As it turns out, prop trading does hit the “principal activities” revenue line item as we stated yesterday to Bloomberg News. Thus the hit on JPM from the Volker Rule does look like +/- 10% of net revenues. We appreciate the quick follow up from Lauren Tyler et al."
An interesting tidbit in today's FRBNY Primary Dealer announcement, which discloses a curious development: JPMorgan is no longer a corporation, but has, effective September 1, become an LLC. Double taxation bids a fond farewell to J.P. Morgan Securities, Inc. We are currently going through Delaware filings to track down the actual application, and hopefully the reasons for the change, which are most certainly a vote of complete confidence in the American corporate system. Elsewhere, Chris Whalen shared some must-read thoughts on JP Morgan LLC's prop trading operation, which may be surprising to all those who believe that prop is a de minimis portion of the firm's revenues.
On JPMorgan Prop Trading
Yesterday we heard from our friends at Bloomberg News, asking for our comments on the implementation of the Volcker-Rule and the business restrictions on large banks. The inquiry was motivated by the announcement by JPMorgan Chase (Q1 2010 Stress Rating: “C”/Outlook: “Negative”) that it was shutting down one of its proprietary trading operations. JPM indicated that other proprietary trading operations would be shuttered later this year.
Our view on the implementation of the Volcker Rule c/o Dodd-Frank with respect to JPM is that much of what is now called “Principal transactions,” which consists of revenue from trading and private equity investing activities (See Page 45 of the JPM 10-K), goes away. This is 10% of run rate revenue at JPM. In 2009, principal transactions accounted for $9.7 billion of $100 billion in total net revenue, so losing this business is not a trivial matter.
As we told Bloomberg News, now you know why JPM is focused on overseas markets. JPM CEO Jamie Dimon must replace the revenue lost due to Dodd-Frank in the next six months and must do so via expansion outside the moribund U.S. economy.
But here is the best part. After the story was published, JPM apparently contacted Bloomberg News and claimed that revenues from prop trading do not get booked in principal transactions. What this means is that the revenue hit to JPM post-Volcker Rule may be larger than we initially expected and more than simply losing the principal activities revenue line item described above.
We wrote a note to Lauren Tyler, head of IR and JPM, asking her to clarify the accounting treatment for prop trading and followed up with a telephone call this AM. We will update you on her response. Also, we are working through the Q2 2010 results from the FDIC and will be writing on that next.