Prop Trading

Today's Meet The Press PR damage control campaign orchestrated on behalf of Jamie Dimon by the fawning press was just another attempt at redirection, in which a faux contrite Jamie Dimon promises that as a result of being '100% wrong' about his prior "Tempest in a Teapot" description of the Bruno Iksil debacle, he has learned his lesson, and in tried and true American fashion deserves a second chance. The rest was filler. What was not said is that the entire business model of the modern US banking edifice, where due to the Net Interest Margin limitations imposed by ZIRP, is one of prop trading as being a glorified hedge fund is the only way the banks can generate a rate of return above their cost of capital. What was also not said was the glaring lies by Blythe Masters from a month ago who swore up and down to CNBC that JPM does not engage in prop trading. What was also not said is that contrary to "conventional wisdom" where a few prop traders have been sacked (most likely due to not taking enough risk) prop trading is alive and well across Wall Street, even if it has been largely rebranded as 'flow trading' - just as the high freaks are scrambling to come up with a new name for HFT because that will make all the difference. What was also not said, nor discussed, is why anyone would trust or invest in these money center banks when their balance sheets are so opaque, even their CEOs flip flop within a month of what is really happening, with accounting standards so poor, that nobody can figure out what they are investing in, and why Mark-to-Market is still halted (Aren't banks finally quote unquote healthy?). Finally, the most important thing not said, was Glass-Steagall, the one law whose overturning allowed the commingling of deposits and hedge fund activity courtesy of Gramm-Leach-Bliley, hilarious called the Financial Services Modernization Act of 1999. If America is to have even a remote hope of returning to normalcy, Glass-Steagall has to be reinstated. Which is why nobody brought it up on MTP: neither the anchor who is accountable to an organization which needs the status quo for advertising revenues, nor the hungry for TV exposure senator, nor the DCF-expert access journalist. Nobody.

1. How do you define market risk?
2. Do you take fixed price positions?
3. Are you exclusively a hedger or do you “optimize” your assets?
4. Do you have a risk policy?
5. How do you monitor trading/hedging limits?.

Update: now S&P is also one month behind Egan Jones: JPMorgan Chase & Co. Outlook to Negative From Stable by S&P. Only NRSRO in pristinely good standing is Moodys, and then the $2.1 billion margin call will be complete.

So it begins, even as it explains why the Dimon announcement was on Thursday - why to give the rating agencies the benefit of the Friday 5 o'clock bomb of course:

• JPMorgan Cut by Fitch to A+/F1; L-T IDR on Watch Negative

What was the one notch collateral call again? And when is the Morgan Stanley 3 notch cut coming? Ah yes:

So... another $2.1 billion just got Corzined? Little by little, these are adding up.

JP Morgan may suddenly be finding itself in deep doodoo, with wide-ranging implications for what this huge prop trading loss means for other less than "fortress balance sheet" banks, all of whose trading blotters are surely riddled with comparable attempts at picking pennies in front of steamrollers, but at least "Europe is fine" and its banks are "solvent". So as a reminder, here is what Europe can look forward to next week: in a word - one of the heaviest bond issuance weeks so far in 2012. And no, these are not slam dunk Bills maturing inside the LTRO. Good luck Europe.

We have presented our opinion on the JPM prop trading desk repeatedly, in fact starting about a month ago. Last night, Senator Carl "Shitty Deal" Levin also decided to join the fray, which is to be expected: the man needs air time. And now, in a surprising twist, competing banks, all of whom have more than enough skeletons in their own prop desk trading closet, are starting to speak up against the bank that should not be named. Enter Deutsche Bank's Jim Reid and his take on the Fail Whale.

Having listened to the conference call (I was roaring with laughter), Jamie Dimon sounded very defensive especially about one detail: that the CIO’s activities were solely in risk management, and that its bets were designed to hedge risk. Now, we all know very well that banks have been capable of turning “risk management” into a hugely risky business — that was the whole problem with the mid-00s securitisation bubble, which made a sport out of packaging up bad debt and spreading it around balance sheets via shadow banking intermediation, thus turning a small localised risk (of mortgage default) into a huge systemic risk (of a default cascade). But wait a minute? If you’re hedging risk then the bets you make will be cancelled against your existing balance sheet. In other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. That is how hedging risk works. If the loss on your hedges is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging risk. You are speculating.

A month ago we warned that JPM's CIO office is nothing short of the world's largest prop trading desk. Not only were we right, but what just transpired is just shy of our worst possible prediction. At the end of the day, the real question is why did JPM put in so much money at risk in a prop trade because we can dispense with the bullshit that his was a hedge, right? Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least "net" is not "gross" and we know, just know, that the SEC will get involved and make sure something like this never happens again.

The iconoclastic rating agency, and fully recognized NRSRO to the dismay of some tabloids, which just refuses to play by the status quo rules, and which downgraded the US for the second time last Friday, to be followed soon by other rating agencies as soon as US debt crosses the $16.4 trillion threshold in a few short months, has just done the even more unthinkable and downgraded Fed boss JPMorgan from AA- to A+.

"What Bernanke is to the Treasury market, Iksil is to the derivatives market"

For all those who have long been curious what the precious metals "queen" thinks about allegations involving her and her fimr in gold and silver manipulation, how JPMorgan is positioned in the precious metals market, and how she views the fringe elements of media, as well as JPMorgan's ethical limitations to engaging in 'wrong' behavior, the answers are all here.

Back in May of last year, just after the now historic silver slamdown of "Silver Sunday" on May 1, 2011, when the metal imploded by nearly 20% in the span of seconds, a move that some considered 'normal', primarily the CFTC, we presented the extended biopic of the infamous "Silverfinger": Bunker Hunt, who attempted to corner the silver market, and succeeded, if only briefly (and they say Playboy has no good articles). Today, courtesy of Grant Williams, we have dredged up the following clip from the archives, which is a 10 minute overview of just how there is really nothing new ever in the silver market, bringing up memories of Silver Thursday, March 27, 1980, and raising questions whether last year the move in precious metals was not due to the same attempt to corner the silver and gold markets as happened 30 years prior. A far more important question perhaps is how was it that tried a redux of the Hunt brothers (and Warren Buffett of course), and when will someone take their place next?

Today, the metals space is abuzz with a CFTC "comment letter" posted on its website by an alleged "current JPM employee." There is only one problem - this letter is either a complete fraud or simply a total mockery, as it provides absolutely nothing new, and merely regurgitates existing manipulation claims already out in the public domain, and backed by precisely zero evidence. How about attaching a signed trade confirm, or a daily internal P&L report, or even a blotter entry? No? Because they don't exist? Needless to say, anyone can submit such an alleged insider letter, and since there is no name associated to it, we would advise everyone to merely enjoy this a prank attempt. Unfortunately, what more such repeated faux "whistleblower letters", which are likely forthcoming, from other "current JPM employees" will do is simply dilute the effect of any real such disclosure that may come in the future. For that purpose, we strongly caution anyone who considers submitting such disinformation attempts from doing so as it will merely impair and discourage any just intent of validated and justified whistleblowing, either at JPM or elsewhere.

And not because his Rule doesn't have teeth.

Bloomberg's Trish Regan (yes, she is no longer at CNBC), has just announced that the bank which earlier announced it is shutting down its catastrophic prop trading desk (at which point shreholders let out a sigh of relief), has proceeded with slashing banker pay by 30% for overall comp and some bonuses by as much as 70%. This follows earlier announcements by Bank of America and Morgan Stanley which earlier said they would limit cash bonuses to $150K for senior positions. At the end of the day, the biggest losers are secondary, non-financial New York jobs (supposedly there are some: rat exterminators; strippers; limo drivers; food spitters also known as waiters?) as each banker jobs indirectly supports up to 3 downstream jobs. In other words between layoffs and comp cutting, the immediate impact will likely be to leave New York City, which is the farthest point on the economic procyclical receiving end, with hundreds of thousands of layoffs. Which incidentally, to the bizarro crazy scientists at the BLS, means that initial claims are about to go negative (with the traditional upward revision in the following week).

Analyst surveys have now risen to the level of fact, as we all know.  Thus Bloomberg and other news outlets feature detailed reports about the opinions of the Sell Side community as though these musings were burned into stone tablets with the fire of the Holy Spirit.