Prop Trading

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.

Will JPMorgan's "Enron" Be The End Of Blythe Masters?

One year after the infamous Jamie Dimon "tempest in a teapot" fiasco, which promptly turned out to be the biggest TBTF prop-trading desk debacle in history, things were going well for JPMorgan. On one hand, the chairman of the TBAC (and thus US Treasury advisor and policy administrator), and former LTCM trader, Matt Zames, was just recently promoted to the sole second in command post at the biggest US bank (and 2nd biggest in the world) by assets, and first in line to take over from Jamie Dimon. On the other hand, one of Mary Jo White's former co-workers, and a JPM defense attorney from Debevoise just became head of the SEC's enforcement division, in theory guaranteeing that the US government would never do more than slap the wrist of JPM in perpetuity. And then, when everything seemed like smooth sailing ahead, the Federal Energy Regulatory Commission (FERC) showed up on March 13, the day before Carl Levin's committee released its latest report on JPM's prop trading blunder, and according to the NYT, alleged that JPM in the past several years, quietly became nothing short than the next Enron. ... But what is worst for JPM, and its brilliant (abovementioned) employee, often times credited with creating the Credit Default Swap product and market (simply an instrument to trade credit with negligible upfront collateral and thus allow equity option-like speculation in the credit realm), is that FERC may be seeking to throw the book at none other than Blythe Masters.

Sergey Aleynikov Suffers The Full Wrath Of A Vindictive US Judicial System

'Commingle' hundreds of millions in client funds which are subsequently stolen rehypothecated as collateral by JPMorgan while your firm goes bankrupt as a result of your idiotic prop trading decisions, and what happens? Your toughest choice is whether to vacation in Fiji or St Barths. That said, being former CEO of the world's biggest TBTF hedge fund also known as Goldman, a former governor and senator, and most importantly bundler for the president of the "transparent" administration certainly helps. On the other hand, be a lowly algo trader and quant programmer working at the aforementioned hedge fund, and having dared to "steal" secret trading client code what can "manipulate markets" and what - you get the full wrath and anger of the FBI, the Federal Court System, and now the Supreme Court.

Chief Advisor To US Treasury Becomes JPMorgan's Second Most Important Man

The man who is the chief advisor to the US Treasury on its debt funding and issuance strategy was just promoted to the rank of second most important person at the biggest commercial bank in the US by assets (of which it was $2.5 trillion), and second biggest commercial bank in the world. And soon, Jamie willing, Matt is set for his final promotion, whereby he will run two very different enterprises: JPMorgan Chase and, by indirect implication, United States, Inc.

And that, ladies and gentlemen, is how you take over the world.

Average Comp Rises To $403,281 As Goldman Offsets Decline In FICC, Equity Trading With Prop Revenue At 2 Year High

Moments ago Goldman reported its Q1 earnings which were strong enough to beat the highest Wall Street estimate, printing at $4.29 on an estimate range of $3.33 to $4.27/share. Revenue was $10.09 billion on estimates of $9.65 billion. What is notable is that while the bank is eating the lunch of its competitors, as it tends to do, in virtually all revenue categories (IB at $1.41 billion, FICC $3.22 bn, Equities: $1.92 bn, Investment Management $1.32 bn, and Prop trading $2.07 bn), it still was unable to match its prior year revenue in the key "client flow" categories of FICC and equities, which dropped from $3.46 billion to $3.22 bn, and $2.25 bn to $1.92 bn, respectively. How did Goldman offset the secular decline in market participation by everyone else? By doing what it does best: prop trading - in Q1 the firm's "Investing and lending" group, aka its Prop group, reported revenue of $2.068 billion (highlighted in the chart below) well higher than the $1.973 billion in Q4 and $1.911 a year earlier. This was the highest prop trading revenue reported by Goldman since Q1 2011 when, as we reported in February, the world was on the verge of being fixed. It wasn't, and the result was a collapse in Goldman prop trading in Q2 2011. Will this year repeat? This remains to be seen. However, for now, Goldman's employees are happy: in Q1 compensation benefits were $4.34 billion, or 43% of revenue. And with Goldman reporting "only" 32,000 total staff at period end, or the lowest since the great financial crisis, the average compensation per employee is once again above the "psychological" $400K barrier, or $403,281 on a trailing 12 month basis to be exact. Bollinger time, boys.

JPM Beats Thanks To $1.1 Billion Reserve Release, Revenue Misses, Drops By $900 Million, NIM At Post-Crisis Low

If JPM and its "fortress" balance sheet and business model are supposed to represent Q1 earnings for US banks, it will not be a good start to the year. While EPS beat expectations solidly, coming at $1.59 on expectations of $1.39 print, this was largly driven by a bigger than expected loan loss reserve release in its real estate portfolios ($650MM pretax), and card services ($500MM pretax), which was the largest combined release number since the $2 billion reduction in Q1 2012. This took down total JPM total loan loss reserves to $20.8 billion, down from $21.9 billion in Q4, and down $5.1 billion from the $25.9 billion a year ago. This happened even though JPM's NPL declined far more modestly, from $10.7 billion to just $10.4 billion. It was the revenue of $25.12 that missed expectations of $25.85, down from $26.05 billion a year ago, and which is the bigger issue for the bank, driven by disappointing trading results with fixed income markets revenue of $4.8 Billion, down 5% YoY, equity markets revenue of $1.3 Billion, down 6% YoY, and Securities Services revenue of $974mm, flat YoY. Not surprisingly in order to maintain expenses, headcount continue to decline from 258,753 to 255,898.

Bundesbank Probing Deutsche Bank, Or Not Much Ado About TBTF

Back in December we reported that "Deutsche Bank Hid $12 Billion In Losses To Avoid A Government Bail-Out" in which we wrote "that Europe's most important and significant bank, Deutsche Bank, hid $12 billion in losses during the financial crisis, helping the bank avoid a government bail-out, according to three former bank employees who filed complaints to US regulators. US regulators, whose chief of enforcement currently was none other than the General Counsel of Deutsche Bank at the time." Our somewhat cynical conclusion at the time was that "since every bank in the world is forced to lie, cheat and mismark its own balance sheets every single day... this may just be completely ignored." Perhaps we were a little bit premature because as the FT reports, "The Bundesbank has launched an investigation into claims that Deutsche Bank hid billions of dollars of losses on credit derivatives during the financial crisis, according to people familiar with the situation." That said, we still stand by our conclusion from four months ago: this, too, theatrical distraction will come and go and nothing at all will change.

After Cyprus, Who Is Next?

Short answer: we don't know.

We do, however, know something we have been pointing out since early 2012 - when it comes to the funding strcuture of European banks, there is a dramatic difference between the US and Europe. In the US, as we showed most recently two months ago, the Big Three depositor banks (JPM, Wells and Bank of America, excluding the still pseudo-nationalized Citi), have a record $858 billion in excess deposits over loans. So what about Europe? Here things get bad. Very bad. So bad in fact that we covered it all just one short year ago. What is the reason for this? Well, as readers can surmise based on what just happened in Europe, it once again has to do with deposits, and specifically the loan-to-deposit ratios of European banks. Because if the US has an excess of deposits over loans, Europe is and has always suffered from the inverse: a massive excess of loans (impaired assets) compared to the most critical of bank liabilities - deposits... One doesn't have to be a rocket scientist to figure out that in a world in which European loans are massively mismarked relative to fair value, and where bad and non-performing loans are an exponentially rising component of all "asset" exposure, it will be the liabilities that are ultimately impaired. Liabilities such as deposits.

Is This The Email That Ended The Career Of JPM's Chief Risk Officer?

On October 2, 2012, news hit that Barry Zubrow, JPM's Chief Risk Officer from November 2007 to January 2012 (in other words, key supervisor of the risk onboarded by the CIO, aka JPM's prop trading desk, for the biggest part of its existence), and then briefly head of corporate and regulatory affairs, would retire from JPMorgan. As Bloomberg reported then, "Now is the right time in my life" to retire, Zubrow, 59, wrote to colleagues in a note today. "We have learned from the mistakes of our recent trading losses." We wonder, if the time was "right" for Zubrow's retirement because the firm realized that the Senate was in possession of the following email sent from Zubrow on April 12, a day before the first fateful Q1 earnings preview conference call in which Jamie Dimon, responding to media reports of Iksil's blow up, said the whole situation was a "tempest in a teapot", in which the Chief Risk Officer essentially told the firm's executives: Braunstein and Dimon, to lie to the public and shareholders?

The Complete History Of JPMorgan's "Monstrous" Derivative Risks And Abuses - The Full Senate Report

Curious what according to Jamie Dimon is just a "tempest in a teapot", or, alternatively, why Mr. Dimon is richer than pretty much all of you, here is the full 307 page report that explains everything, including all the events that transpired at the JPM CIO office, all the trades that led up to the "monstrous" Whale portfolio, leading to an epic prop trade failure, coupled with countless lies and misrepresentations to regulators, to investors, to the public, and to politicians, many of which under oath. Oh yes, free Jamie Dimon!

"Too Big To Regulate" JP Morgan "Lied" And "Deceived" Regulators, Investors And Public, Senate Finds

Moments ago, ahead of tomorrow's 9:30 am Senate hearing on JP Morgan's 2012 attempt to corner the IG9 market through its London-based CIO office using depositor cash which as everyone now knows went horribly wrong, titled "JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses,” the Permanent Subcommittee on Investigations has released its comprehensive 300 pages review of the London Whale fiasco. The report, in a nutshell, finds that both Jamie Dimon and JP Morgan lied and misled investors, regulators and Congress, that it forced its traders to hide growing losses, that it hid trades banned by the Volcker rule (just as we first said in April 2012 in "Why JPM's "Chief Investment Office" Is The World's Largest Prop Trading Desk: Fact And Fiction") and that JP Morgan may, by extension, be "too big to manage" or "too big to regulate" as Carl "Shitty Deal" Levin summarized.