Prop Trading

A Look At The Fed's Nest In 2014: Here Are Next Year's Voting Hawks And Doves

With Janet Yellen now confirmed as Bernanke Mark 2, it is time to recall that in addition to a new Chairman, four of the Fed's voting members will also rotate. And while below is the latest preview of the voting FOMC members (previously 2011 and 2012) ranked by Reuters in terms of their dovishness and hawiskness, the reality is that the peripheral Fed presidents (here we focus on the Hawks obviously) are nothing but figureheads whose only function is to be roundly ignored if and when they dissent with the new Chairman.

JPMorgan's Mortgage Settlement May Reach $20 Billion

While a mortgage-related lawsuit and/or a settlement was long in the making, and was well-known to most in the industry, it is the monetary aspect of the resolution that is slowing down the outcome. Because if the NYT is correct, not even taking credit for all its fake "earnings" in the form of a complete reserve release would save JPM: "Underscoring the breadth of the scrutiny, the people said, JPMorgan and the Department of Housing and Urban Development briefly discussed the possibility of striking a wide-ranging settlement to conclude many of the looming mortgage investigations from federal authorities and state attorneys general. But the housing agency floated a price tag of about $20 billion for the settlement, the people said, effectively derailing settlement talks with JPMorgan lawyers, who were stunned by the size of the proposed penalty and expected to pay a fraction of that sum."

CFTC Seeks Admission Of Market Manipulation From JPM; Jamie Balks

Even as JPMorgan seems set to put its London Whale troubles behind it with a nearly $1 billion imminent settlement, while at the same time throwing two mid-level traders at NY prosecutors and washing its hands of the whole tempest in a teapot affair, a curious snag has appeared. The CFTC, which in the past has never had a problem with promptly settling any market manipulation abuse with any bank in exchange for a small cash-greased slap on the hand, is suddenly a sticking point in JPM's ability to just walk away from the biggest prop trading Snafu in history. As WSJ reports, "the CFTC is focusing on the bank's increasingly aggressive trades made over several months early last year, when it added tens of billions of dollars to its derivatives positions—contracts tied to investment-grade corporate bonds, these people say. The CFTC is likely to use new powers granted by the Dodd-Frank law that allow it to charge firms for recklessly manipulating markets, say people familiar with the agency's thinking."

Deep Thoughts From Jamie Dimon's Daughter On Fi-Nance, "What The Hell Is A Bond", And Who Should Get Taxed

One would think Laura Dimon, the daughter of one James Dimon, would be on familiar terms with such concepts as bonds, capital structure and finance (especially the more arcane substrata thereof). After all the father of the graduate from the Columbia School of Journalism (author of such previous pieces as "The Last Office Taboo for Women: Doing Your Business at Work" which examines "the lengths women go to avoid getting caught in the stall") is none other than the CEO of the largest bank in the US, best-known for such "one-time items" as constantly recurring legal charges associated with financial innovation gone horribly wrong (today's rumor of a $750MM settlement over the bank's London-based prop trading group being a case in point). As it turns out, one may be mistaken...

JPM's London Whale Fine: At Least $750 Million

What started off as a tempest in a teacup just ended up becoming not only the largest, $6.2 billion prop trading blunder in JPMorgan history, but the latest ligitation headache for Jamie Dimon amounting to at least $750 million to get the government off his back, and who will of course neither admit nor deny it used customer deposits in an attempt to corner the IG and HY markets:

  • JPMORGAN SAID TO AGREE TO AT LEAST $750 MILLION IN WHALE FINES
  • JPMORGAN SAID TO SEEK END TO U.S., U.K REGULATORY PROBES IN Q
  • SOME WHALE SETTLEMENTS MAY BE ANNOUNCED AS EARLY AS THIS WEEK
  • JPM TO ADMIT FAULTY INTERNAL CONTROLS IN WHALE SETTLEMENT: WSJ

Of course, we hope that as part of the settlement JPM will announce just what it is investing its current $500 billion in prop trading dry powder in as we disclosed last week.

JPMorgan Balance Sheet Update: Record $500 Billion In Prop Trading Dry Powder

In the aftermath of the JPM CIO prop trading blunder, the firm disclosed that the capital used for risky bets such as attempting to corner the IG or HY markets was the result of excess deposits over loans, which at that time stood at $423 billion, resulting in $323 billion in CIO invested and non Marked-to-Market "Available for Sale" securities. Following yesterday's CFO update on the state of the mortgage market, which we recapped here, and which warned how the recent spike in rates would impact the firm's balance sheet, the firm also provided an updated snapshot of its balance sheet as of June 30, broken down by core capital components. We now know that in the one year period since the London Whale blunder, the firm's available "dry powder" which can be invested in any type of AFS security, or in stocks, or bonds, or any other risk asset for that matter, has now risen to a record $497 billion, the result of a record $1203 billion in deposits offset by just $706 billion in loans, or what we assume is a record low 60% loan-to-deposit ratio.

JPMorgan Warns: Increasing Rates Have "Reduced The Remaining Refinance Opportunity By More Than 50%"

About an hour ago, Bank of America served the latest indication that the US housing "recovery" (also known as the fourth consecutive dead cat bounce of the cheap credit policy-driven housing market in the past five years) may be on its last breath. Namely, the bank announced that it will eliminate about 2,100 jobs and shutter 16 mortgage offices as rising interest rates weaken loan demand, said two people with direct knowledge of the plans and reported by Bloomberg. In some ways this may be non-news: previously we reported, using a Goldman analysis, that up to 60% of all home purchases in recent months have been, which of course shows just how hollow the "recovery" has been for the common American for whom the average home has once again become unaffordable. However, judging by an update presentation given earlier today by the CFO of none other than JP "fortress balance sheet" Morgan, things are rapidly going from bad to worse for the banking industry as a result of the souring mortgage market for which, absent prop trading, loan origination is the primary bread and butter.

Asian Fat Finger Roils An Otherwise Boring Overnight Session

Starting with the Asian markets this morning, it appear the roller coaster ride for markets continued overnight. Asian equities started the day trading weaker but shortly after the open though, all of Asia bounced off the lows following the previously noted surge in Chinese A-shares soaring more than 5% in a matter of minutes in what was initially described as a potential “fat finger” incident. As DB notes, alternative explanations ranged from a potential restructuring of the government’s holdings in some listed companies, to market buying ahead of a rate cut this coming weekend. All indications point toward a fat finger. The A-share spike has managed to drag other indices along with it though some gains have been pared. Yet for all the drama the Shanghai Composite soared... and then closed red. The region’s underperformer is the Nikkei (-0.75%). Elsewhere, the NZDUSD dropped 0.5% after a magnitude 6.8 earthquake struck the city of Wellington this morning. Looking at the US S&P500 futures are trading modestly higher at 1660. Looking ahead to today there is very little in the way of Tier 1 data to be expected. Housing starts/permits from the US and the preliminary UofM Consumer Sentiment reading for August are the main reports. The moves in rates and perhaps oil will probably offer some markets some directional cues.

The London Whale Has Become The London Snitch

Somewhat ironically, the "punishment" of Goldman and JPMorgan has boiled down to the punishment, or lack thereof, of two Frenchmen. On one hand, we have Fabrice Tourre, who we are led to believe (laughably so) was solely-responsible for all CDO-related transgressions at Goldman in the 2003-2007 period. On the other, we have the London Whale, former JPMorgan employee and also French citizen, Bruno Iksil who was the catalyst and public face, that led to the unwind of the biggest prop trading desk in history. But while Fabulous Fab was scapegoated to the full extend of the crony law, Bruno is set to walk. The reason: the London Whale has become the London Snitch.

The One Chart Explanation Behind Ben Bernanke's "Open Mouth Operation" Scramble

The pain that banks have experienced can best be seen in the following chart showing the latest update in "Net unrealized gains (losses) on available-for-sale securities" from the Fed's weekly H.8. Two things come to mind: i) For the first time since April 2011, unrealized gains in AFS portfolios among the entire US banking sector became losses, and  ii) The two month rate of loss creation in MTM exempt AFS portfolio soared to the highest in series history.

Fed, Treasury Investigating Bloomberg Client Surveillance

As reported on Friday, the most recent example of a breach in informational Chinese walls was confirmed at Bloomberg, where it was discovered that reporters have the same degree of client surveillance as workers on the API/terminal side. The reason why this is problematic is that since Bloomberg is a monopolist in the financial terminal industry, with such competitor attempts as Reuters' Eikon being massive failures, virtually every finance professional needs a terminal (even if the rate of sale of such terminals is slowing down as a result of the ongoing financial margin headaches). Which means that Bloomberg journos, an increasingly competitive service to the likes of Dow Jones, Reuters and AP, may have had an unfair advantage when it comes to tracking their "pray" - Bloomberg's own clients. And now, following the original Goldman complaint which Bloomberg said ended such informational commingling, it is the turn of the Treasury and the Fed (certainly very heave users of the BBG Trading terminal) to complain. What is left unsaid in all of this is the simple question of just why is it material information what the Fed, arguably an entity that at least in a normal world should not have any day to day trade interactions with financial markets, looked up on its trading terminal.