JPM Hammered By Massive $9.2 Billion In Legal Expenses, Posts First Loss Under Dimon; Takes $1.6 Billion Reserve ReleaseSubmitted by Tyler Durden on 10/11/2013 07:42 -0400
So much for the JPM "fortress balance sheet." Moments ago the bank which 18 months ago stunned the world with the biggest prop trading loss in history, just reported its first quarterly loss under Jamie Dimon, missing expected revenue of $24 billion with a print of $23.88 billion, but it was net income where the stunner was in the form of a $0.4 billion net income. The reason: the fact that from the government's best friend, Jamie Dimon has become the punching bag du jour, and having to pay $9.15 billion in pretax legal expenses, the biggest in company history. Considering that the other key component of Q3 net income was a whopping $1.6 billion in loan loss reserve releases, one wonders just how truly strong Q3 earnings really were. But of course, this being Wall Street, all negative news is "one-time" and to be added back. Which is why JPM promptly took benefit for all charges, which means adding back the $7.2 billion legal expense and $992 MM reserve release after tax benefit. In short: of the firm's $1.42 in pro forma EPS, a whopping $1.59 was purely from the addback of these two items.
Despite stock (not bond) euphoria yesterday that a DC debt ceiling deal was sealed leading to the second largest risk ramp of 2013, last night was spent diffusing the excitement as one after another politician talked back the success of a "non-deal" that Obama rejected, at least according to the NYT. As a result, with both retail sales data and the PPI not being released (and the only data of note the always leaked UMichigan consumer confidence) markets will again be at the behest of developments on Capitol Hill, with some talk from Republicans suggesting a deal as early as today could be possible in an effort to reopen government on Monday. It is entirely possible that talks could continue over the weekend though, which would ensure a gappy open to Asian markets on Monday.
Hard to argue with this... just one more quarter, and everything will be fixed... Of course, when you've got Abenomics, Yellenomics, and Draghinomics on your side, what does it matter?
Everyone knows that one of the immediate catalysts of the near systemic collapse in the aftermath of the Lehman bankruptcy, one which set in motion the sequence of events that led to Bernanke increasing the Fed's balance sheet fourfold, was when the Reserve Primary Money Market Fund announced on September 16 that the value of its shares had dropped to 97, sparking an epic run on money market funds, and requiring an immediate bailout first from its sponsor, and then the Federal Reserve and US government. What is far less known is that the Reserve Primary Fund was just one of many money market funds that got locked out and was in danger of collapse following the decision to let Dick Fuld hang. How many? According to a research note released by the NY Fed itself, at least 28 more!
For all expectations of a big jump in US futures overnight on the largely priced in Janet Yellen nomination announcement which is due at 3 pm today, the move so far has been very much contained, as expected, with a modest 90 minute halflife, as the markets' prevailing concern continues to be whether the debt ceiling negotiation will be concluded by the October 17 deadline or if it would stretch further forcing the government to prioritize payments. There is however some hope with Bloomberg reporting that some possible paths out of the debt impasse are starting to emerge with less than a week before U.S. borrowing authority lapses after Obama said he could accept a short-term debt-limit increase without policy conditions that set the terms for future talks. Whether this materializes or just leads to more empty posturing and televized press conferences is unclear, although as Politico reports, the stakes for republicans are getting increasingly nebulous with some saying they are "losing" the fight, while the core GDP constituency is actually liking the government shutdown.
It’s clear to everyone by now that the government of the largest country in the world is careening towards default in just over 200 hours. Yet curiously, even though the US government’s completely ridiculous, untenable fiscal situation is a front page embarrassment for the entire world to see, markets have barely budged. A few very short-term rates have shot up, but for the most part, stocks are very close to where they were before the shutdown. Stocks and bonds haven’t moved because nobody cares what’s happening in the US government anymore. And that’s because every serious investor understands that the US government long since abdicated any economic power to the banking sector. Everyone knows that the Fed is going to keep printing money, ergo they’re going to keep sending markets higher. And this debt ceiling charade only proves it. The secret is out there in the open. And now it’s completely obvious who’s really in charge.
Isn’t it wonderful how the US believes (whether that be the citizens or the politicians) that the state will never default on its debt repayments?
A year or two from now the insurance companies will be getting big increases. Whatever you think of Obamacare today, wait two years, you will come to hate it.
- Hilsenrath: Tense Negotiations Inside the Fed Produced Muddled Signals to Markets (WSJ)
- Biggest US Foreign Creditors Show Concern on Default Risk (BBG)
- Shutdown Costs at $1.6 Billion With $160 Million Each Day (BBG)
- What default? Republicans downplay impact of U.S. debt limit (Reuters)
- Top Bankers Warn on U.S. Debt Proposal (WSJ)
- India to stick with austerity despite looming election (Reuters)
- Japan's Current-Account Surplus Plunges (WSJ)
- Amazon Wins Ruling for $600 Million CIA Cloud Contract (BBG)
- German Factory Orders Unexpectedly Fall on Weak Recovery (BBG)
- Britain's Higgs, Belgium's Englert win 2013 physics Nobel prize (Reuters)
- Supreme Owner Made a Billionaire Feeding U.S. War Machine (BBG)
There is a profound disconnect between the Higher Education cartel and the economy and what higher education should cost in a world where information, instruction, and knowledge have fallen to the cost of bandwidth; i.e., near zero. What was once costly and scarce (knowledge and instruction) is now nearly free and abundant, readily available on any digital device anywhere in the world with a connection to the Web. There is no need to concentrate students in a campus with a library; every web-connected digital device is a library and university combined. The Higher Education cartel is perfectly happy to encourage degree inflation (at enormous expense, of course), but this zeal for issuing student-loan-funded diplomas fails to address two structural disparities: the one between the skills needed to prosper in the emerging economy and the skills colleges are providing students, and the widening income/wealth/education gap between the wealthy and the non-wealthy.
Yesterday we described the various scenarios available to Treasury in the next few weeks should the shutdown and debt ceiling debacle carry on longer than the equity markets believe possible. As BofAML notes, however, the most plausible option for the Treasury could be implementing a delayed payment regime. In such a scenario, the Treasury would wait until it has enough cash to pay off an entire day’s obligations and then make those payments on a day-to-day basis. Given the lack of a precedent, it is hard to quantify the impact on the financial markets in the event that the Treasury was to miss payment on a UST; but the following looks at the impact on a market by market basis.
Looking at the equity market and some of the background dynamics Citi's FX Technical group cannot help but be reminded of 2011. They also warn, despite the constant hope-driven rallies this week, there are also some aspects of what we saw in 1998 and similarities with 2000 that are worth noting. The bottom line, we have had the view for some time that we would see a much deeper correction in the equity market (in excess of 20%). Recent price action and developments might (just might) be suggesting that it is time to revisit that theme.
One of these things is not like the other...
One thing is now abundantly clear: 2013 is now one big scratch for bankers who were expecting that this year bonuses would finally pick up from the prior several years mediocre performance and catch up to the record days of 2009 (just after the biggest wholesale bank bailout in history). The WSJ summarizes the situation best: "I haven't seen morale this bad since the Titanic," said Richard Stein, a senior recruiter at Caldwell Partners CWL.T -3.41% who specializes in financial services. And if bankers are not happy, nobody else will be (here's looking at you dear perpetual banker bailout ATM known as US taxpayers).
Despite the president's tongue-in-cheek warning to Wall Street that this time it's different, and it that "it should be concerned", that same Wall Street continues to roundly mock his attempts to talk it lower on the third day of America's "shutdown", knowing very well that if things ever turn bad, Mr. Chairman, aka the S&P chief risk officer, will get to work, and rescue everyone from that pesky thing known as losses. Whether the offsetting optimism was driven by made up China non-manufacturing PMI rising from 53.9 to 55.4, the highest in six months, or just as made up non-core European PMI data which also beat expectations despite Germany Services PMI continuing to telegraph a weakness, dropping from 54.4 to 53.7, is unknown and once again not important. So while futures are modestly lower if only until such time as the daily 3:58pm VIX slam takes place just before market close, do not expect any major moves in stocks until either the GOP finally folds and lets Obama have his way, or bundles all shutdown legislation into the debt ceiling negotiation, and careens the US right into the debt ceiling deadline on October 17 without any legislation in place.