Prop Trading

Frontrunning: November 18

  • What can possibly go wrong: Tepco Successfully Removes First Nuclear Fuel Rods at Fukushima (BBG)
  • Japan's Banks Find It Hard to Lend Easy Money (WSJ)
  • U.S. Military Eyes Cut to Pay, Benefits (WSJ)
  • Airbus to Boeing Cash In on Desert Outpost Made Field of Dreams (BBG); Dubai Air Show: Boeing leads order books race (BBG)
  • Sony sells 1 million PlayStation 4 units in first 24 hours (Reuters)
  • Russian Tycoon Prokhorov to Buy Kerimov's Uralkali Stake (WSJ)
  • Google Opening Showrooms to Show Off Gadgets for Holidays (BBG)
  • Need. Moar. Prop. Trading: Federal Reserve considering a delay to Volcker rule (FT)
  • Raghuram Rajan plans ‘dramatic remaking’ of India’s banking system (FT)
  • SAC Capital's Steinberg faces insider trading trial (Reuters)

Goldman Revenues Tumbles, FICC Craters Down 44%; EPS Beat As Compensation Slashed

On the surface Goldman's earnings, which just hit the tape at $2.88/share, and which beat expectations of $2.47 - higher than the $2.85 from a year ago - were far better than some of the worst case expectations. That is, until one actually looks at how they were derived. Sadly for Goldman's employees, the EPS beat was not due to a rise in actual revenues, which missed expectations of $7.35 billion massively, printing at $6.72 billion and down 20% from a year ago, but due a slashing in compensation expenses, which were brutalized from $3.7 billion in Q3 2013 and Q2 2013, to "only" $2.4 billion, a 35% Y/Y drop!

Bank Of America Misses Despite Surge In Reserve Releases Amounting To Over Quarter Of Q3 "Earnings"

On the surface, the latest Q3 bank numbers to come out of Bank of America today, were not quite as bad as those previously reported by the other TBTFs, namely JPM, Wells and Citi. At a (massively adjuste4d) EPS of $0.20, this was just 1 cent below the expected $0.21, even as net revenue of $21.74 billion missed expectations of $21.95 billion. So far so good. At least so good until one realizes that of the $5.1 billion in pretax income, some 1.4 billion, or over a quarter, was from the usual accounting magic well of gimmicks: loan loss reserve releases! In fact, the $1.391 billion in reserve reduction driven by $1.7 billion in charge offs offset by a tiny $0.3 billion in provisions, was the highest reserve release in the past year, only lower than last Q3's $2.3 billion, when the bank - just like today - was in desperate need of any source of fake earnings. Why? Because the bank's loan origination group, just like all other banks', cratered, and saw non-interest income in its real estate services division implode by $1.5 billion to just $844 million. So much for whatever housing recovery the rose-colored glasses ones had envisioned...

Wells Crippled By Mortgage Pipeline Shutdown: Net Interest Margin Slides, Reserve Release Soars

Take all the talk about how "soaring" (to below 3%) rates will not impact housing, or that rising rates are great for banks because they help boost Net Interest Margins, and dump it in the trash. Why? Exhibit A - Wells Fargo, the bank which is most reliant on the housing market (unlike such prop trading powerhouses as JPM and Goldman) to generate revenues (which missed expectations) which just announced its Q3 earnings. The numbers of note were not among the fudged top or bottom-line headline grabbers. They were far uglier, and were as follows.

JPM Hammered By Massive $9.2 Billion In Legal Expenses, Posts First Loss Under Dimon; Takes $1.6 Billion Reserve Release

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.

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.