Prop Trading

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.

Frontrunning: February 15

  • G20 struggles over forex, at odds over debts (Reuters)
  • Alwaleed Sells Airbus A380 to Invest in Middle East Firms (BBG)
  • GOP Stalls Vote on Pick for Pentagon (WSJ)
  • ECB officials rebuff currency targeting as G20 meets (Reuters)
  • Not good for the reflation effort: Muto leads as Japan PM close to choosing nominee for Bank of Japan chief (Reuters)
  • M&A Surges as Confidence Spurs Deals in Computers to Consumer (BBG)
  • JPMorgan’s head of equity prop trading Gulati to launch own fund (FT)
  • Tiffany & Co. sues Costco over engagement rings labeled ‘Tiffany' (WaPo)
  • JPMorgan Said to Fire Traders, Realign Pay Amid Slump (BBG)
  • Broker draws Tullett into Libor scandal  (FT)
  • Airbus drops Lithium-Ion batteries for A350 (Reuters)

Get Rich Quick Schemes For The Rest Of Us: Rent Out Your Neighbor's Foreclosed House

When it comes to "get rich quick" housing schemes, one can be a bank prop trading desk or a hedge fund, with access to the Federal "REO-To-Rent" program which grants a costless purchase of distressed real estate with zero cash down, in order to facilitate the subsidized removal of housing inventory from the market, or, if one is not too big to fail, one can simply pull off an Andre Barbosa, the infamous Boca Raton squatter who used the "adverse possession" loophole to claim title to a multi-million mansion. Or, as it turns out now, one can take advantage of the latter and lever it up even more, by renting out other people's foreclosed property without ever being present, while claiming ownership rights through "adverse possession", keeping the inbound cash flow while having someone else on the hook should the cops come knocking.

$600 Billion In Trades In Four Years: How Apple Puts Even The Most Aggressive Hedge Funds To Shame

Everyone knows that for the better part of the past year Apple was the world's biggest company by market cap. Most also know that AAPL aggressively uses all legal tax loopholes to pay as little State and Federal tax as possible, despite being one of the world's most profitable companies. Many know, courtesy of our exclusive from September, that Apple also is the holding company for Braeburn Capital: a firm which with a few exceptions, also happens to be among the world's largest hedge funds, whose function is to manage Apple's massive cash hoard with virtually zero reporting requirements, and whose obligation is to make sure that AAPL's cash gets laundered legally and efficiently in a way that complies with prerogative #1: avoid paying taxes. What few if any know, is that as part of its cash management obligations, Braeburn, and AAPL by extension, has conducted a mindboggling $600 billion worth of gross notional trades in just the past four years, consisting of buying and selling assorted unknown securities, or some $250 billion in 2012 alone: a grand total which represents some $1 billion per working day on average, and which puts the net turnover of some 99% of all hedge funds to shame! Finally, what nobody knows, except for the recipients of course, is just how much in trade commissions AAPL has paid on these hundreds of billions in trades to the brokering banks, many (or maybe all) of which may have found this commission revenue facilitating AAPL having a "Buy" recommendation: a rating shared by 52, or 83% of the raters, despite the company's wiping out of one year in capital gains in a few short months.

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Over the course of the last two weeks, I attempted to explain to the general investing public how, thanks to the virtual impossibility of distinguising between 'legitimate' market making and 'illegitimate' prop trading, some of America's systemically important financial institutions are able to trade for their own accounts with the fungible cash so generously bestowed upon them by an unwitting multitude of depositors and an enabling Fed. 

US Markets Closed On Fifth Anniversary Of Jerome Kerviel Day

To some, today is Martin Luther King day and as a result the US markets are closed, especially since today is also the day when Obama celebrates his second inauguration with Beyonce, Kelly Clarkson and James Taylor at his side (hopefully not on the taxpayers' dime). To others, January 21 is nothing more than the anniversary of the real beginning of the end, when five years ago a little known SocGen trader named Jerome Kerviel could no longer hide his massive futures positions and was forced to unwind them, sending global indices plunging resulting in the biggest single day drop in the Dax (-7.2%), and punking the Fed into an unannounced 75 bps cut. Luckily, today such cataclysmic unwinds are impossible as the market is priced perfectly efficiently, without central bank intervention, price transparency is ubiquitous and the Volcker rule has made prop trading by banks, funded by Fed reserves (which are nothing more than the monetization of excess budget deficits) and excess deposits, impossible.

How JPMorgan's $5 Million Loss Rose 80-Fold In Minutes After "A Confrontation Between Traders"

"April 10 was the first trading day in London after the “London Whale” articles were published. When the U.S. markets opened (i.e., towards the middle of the London trading day), one of the traders informed another that he was estimating a loss of approximately $700 million for the day. The latter reported this information to a more senior team member, who became angry and accused the third trader of undermining his credibility at JPMorgan. At 7:02 p.m. GMT on April 10, the trader with responsibility for the P&L Predict circulated a P&L Predict indicating a $5 million loss for the day; according to one of the traders, the trader who circulated this P&L Predict did so at the direction of another trader. After a confrontation between the other two traders, the same trader sent an updated P&L Predict at 8:30 p.m. GMT the same day, this time showing an estimated loss of approximately $400 million. He explained to one of the other traders that the market had improved and that the $400 million figure was an accurate reflection of mark-to-market losses for the day."

The "Big Three" Banks Are Gambling With $860 Billion In Deposits

A week ago, when Wells Fargo unleashed the so far quite disappointing earnings season for commercial banks (connected hedge funds like Goldman Sachs excluded) we reported that the bank's deposits had risen to a record $176 billion over loans on its books. Today we conduct the same analysis for the other big two commercial banks: Wells Fargo and JPMorgan (we ignore Citi as it is still a partially nationalized disaster). The results are presented below, together with a rather stunning observation.