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Listen Carefully and You Can Hear the Crumbling Of The Sovereign Nation Formerly Known As JP Morgan

Reggie Middleton's picture





 

First, pardon my tardy response to this JP Morgan news. I'm currently in Europe and was jet-lagged asleep when this popped. Of course, BoomBustBloggers know that I will be on the case. To begin with, a summary as pulled from ZeroHedge

In Corporate, within the Corporate/Private Equity segment, net income (excluding Private Equity results and litigation expense) for the second quarter is currently estimated to be a loss of approximately $800 million. (Prior guidance for Corporate quarterly net income (excluding Private Equity results, litigation expense and nonrecurring significant items) was approximately $200 million.) Actual second quarter results could be substantially different from the current estimate and will depend on market levels and portfolio actions related to investments held by the Chief Investment Office (CIO), as well as other activities in Corporate during the remainder of the quarter.

Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO's synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO's AFS securities portfolio. As of March 31, 2012, the value of CIO's total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.

The Firm is currently repositioning CIO's synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm's overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.

Accordingly, net income in Corporate likely will be more volatile in future periods than it has been in the past.

The Firm faces a variety of exposures resulting from repurchase demands and litigation arising out of its various roles as issuer and/or underwriter of mortgage-backed securities (“MBS”) offerings in private-label securitizations. It is possible that these matters will take a number of years to resolve and their ultimate resolution is currently uncertain. Reserves for such matters may need to be increased in the future; however, with the additional litigation reserves taken in the first quarter of 2012, absent any materially adverse developments that could change management’s current views, JPMorgan Chase does not currently anticipate further material additions to its litigation reserves for mortgage-backed securities-related matters over the remainder of the year. 

All of this is coming form the just filed 10-Q. The full link is here. 

Now, just so those who have not followed me for some time don't get it twisted, I want all to know that I'm a longer term strategist. I'm not a trader! As such, I don't focus on daily stock prices or live my life quarter to quarter. What I do is paint the big picture over time. I'm not magic, I'm not always right, but I am honest. In addition, although I'm not always right, I have been right over 90% of the time since the beginning of the credit bubble in 2000 to date. To wit regarding JP Morgan, on September 18th 2009 I penned the only true Independent Look into JP Morgan that I know of. It went a little something like this:

Click graph to enlarge

image001.png

Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide. 

This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent - particularly if that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent). I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.

    1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
    2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
    3. As the markets climb on top of one big, incestuous pool of concentrated risk...
    4. Any objective review shows that the big banks are simply too big for the safety of this country
    5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish.

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010

Mr. Middleton discusses JP Morgan, bank risk and technology and is the only pundit in the financial media that we know of that called Apple's margin compression issues and did so successfully just hours before they reported! Click here or click below to see the video.

Reggie Middleton with Max Keiser on the Keiser Report and RT Television - Discussing JP Morgan, Derivatives, Fraudclosure and the US Oligarchy

Here I discuss JP Morgan's suffering from ZIRP and bad mortgages (still), hence the losses that JPM's Dimon was just bitching about a year or two later - simply reference the MSM JPMorgan's DimonMortgage Woes Still Hit Earnings.

Look at the video below where I warn of JP Morgan's derivative business, and where I was just about the ONLY one warning that JPM's risk is simply a time bomb waiting to go BANG! Guess what I just heard? That's right! BANG!!!

Also, take note of how I said that JP Morgan WILL NOT be in this significant loss on its own. It's counterparties exist in a very, very small pool, and I doubt if any of them really have the truly economic capital to back these losses. They will simply turn to their counterparties who will in turn turn to their counterparties. The only problem is that this counterparty past the buck daisy chain is only 5 or 6 banks long. What do you think happens when this game of musical chairs comes to an end? Buy the MFD!!!

Of course, you know I'm going to say "I told you so!" Reference So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't? and then Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? You see, in said piece, ZeroHedge dutifully reported that Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure- a very interesting refresh of what I called out two years ago through "The Next Step in the Bank Implosion Cycle???":

The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png 

Again, from ZeroHedge

... and just for some clarity on how this occurred. We know the positions that Iksil held were in IG9 (more likely to be tranches) but this $2bn loss comes from a tiny 12bps decompression in the index - which means the DV01 must be huge...(as we already knew given the massive rise in net notional that we warned about)...

This is the Investment Grade credit index series 9 - which is the most active tranche-related index and was the index that Iksil had driven massively rich to its fair-value...

Of course, there's more to this story. After all, there is NEVER just one roach. I will cover that in my next post on the topic, which will entail COUNTERPARTY RISK. That's right, do you really think this will effect just JP Morgan?  In the meantime and in between time, here's a subscription dump of our archives for JPM to placate the insatiable thirst of the BoomBustBlog paid subscriber:

 


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Fri, 05/11/2012 - 07:52 | Link to Comment fledermaus
fledermaus's picture

In red you have outstrips the world economy by 21 'Billion'.  I think you mean TRILLION.  A Billion is chump change these days to these TBTF Doomsday Machines...

Fri, 05/11/2012 - 07:41 | Link to Comment sessinpo
sessinpo's picture

Day late dollar short to try to get more subscribers. You can do better then that. Try posting ahead of it like TD did.

Fri, 05/11/2012 - 07:42 | Link to Comment Obadiah
Obadiah's picture

Holy shit theres the definition of too big to fail.  Nice work Jamie. God  WILL fix it in this life or the next.

reggie just keep cranking out the good stuff and try try to keep your ego in check and your be even greater

Fri, 05/11/2012 - 07:38 | Link to Comment ebworthen
ebworthen's picture

JP Morgan Chase is part of the U.S. Government by proxy.

They will not fail, they will be bailed.

The FED will always rescue.

The taxpayer screwed.

A no bailout death and dissolution would be delicious - but doubtful.

Fri, 05/11/2012 - 07:28 | Link to Comment Sandmann
Sandmann's picture

I'm currently in Europe and was jet-lagged asleep when this popped.

Reggie, this happened in LONDON......which is "in Europe"  so you have no excuse.  You should be screaming at British Regulators asking why they let this happen.

http://ec.europa.eu/commission_2010-2014/barnier/headlines/topics/financ...

If the British cannot get these idiots under control they should send some of the 13,500 soldiers deployed for The Olympics and occupy JP Morgan's offices. This is getting repetitive and tedious.

London is nothing more than a tinpot island state with an outdated costume drama in a Gilbert & Sullivan production housing Grand Larcenists and Major Buffoons. If the political class cannot bring Criminal Gangs to heel it is time for New Leaders to emerge with harsher means of reprisal

Fri, 05/11/2012 - 08:57 | Link to Comment JOYFUL
JOYFUL's picture

Sorry ol sock, screamin is so ...last millenium\munchian....Reggie don't need to scream, he already showed us that he carries a big stick...n rides da waves...

xactly what one needs to do in this post-reality paradigm.

He called this, he owns this, I hope he makes a million or two dozen offa it.

Reggie is a "new leader" personified...which is why I pegged him for 'the big house' on Pennsylvania long time back...it's not too late...Rite in Reggie for Regus Supremus in November!

...tinpot island state with an outdated costume drama in a Gilbert & Sullivan production housing Grand Larcenists and Major Buffoons...

choice stuff Sandmann...kudos!

Fri, 05/11/2012 - 09:07 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

Forgot to introduce you two, JOYFUL meet Sandmann...

Sandmann is one angry pup. From within the square mile yet (prolly) refuses to steal. Disappointing, although I admire his integrity.

Integrity is still something in 201? isn't it?

Fri, 05/11/2012 - 09:22 | Link to Comment JOYFUL
JOYFUL's picture

tanks for the intro Gene...

gotta own up, I couldn't get a handle on the lad! Hope whatever litter he sprung from turns out to be another Yardbirds type Brit idiosyncracy...

we need more Jeff Becks\Jimmy Pages to get us thru this next phase...

n yup..

Integrity is still what it's all aboot!

Fri, 05/11/2012 - 07:41 | Link to Comment Mitzibitzi
Mitzibitzi's picture

What do you think the thousands of sociopath graduates of the 'Common Purpose' classes have been trained for? They are the new leaders, just waiting to take over, but the harsher means of reprisal won't be aimed at the banks... having let us clever, hard-working peasants off the leash for a couple of hundred years to let us invent them the standard of living they dreamt of, it's now time to remove surplus population and put the rest of us back into serfdom where we belong. They aren't even trying very hard to hide it, any more, so the endgame must be pretty near.

Fri, 05/11/2012 - 07:01 | Link to Comment AmazingLarry
AmazingLarry's picture

I'm deriving this is bullish?

Fri, 05/11/2012 - 06:10 | Link to Comment Optimusprime
Optimusprime's picture

Just wondering--to what extent is this development self-inflicted and to what extent might it be related to war with Goldman Sachs?

Fri, 05/11/2012 - 06:34 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

Self-inflicted or not, it doesn't matter cause JPM just bought CDS on itself.

WTF!!

Fri, 05/11/2012 - 06:56 | Link to Comment Mitzibitzi
Mitzibitzi's picture

And which counterparty are they expecting to pay out, exactly?

Ah, my bad! It'll be John Q Taxslave, as per fucking usual!

Fri, 05/11/2012 - 07:23 | Link to Comment Vince Clortho
Vince Clortho's picture

Must keep these boys in the game.  We would be lost without them.

Anyone can have a run of bad luck.  The U.S. Taxpayers will have them up and running in no time.

Fri, 05/11/2012 - 07:40 | Link to Comment Xinu
Xinu's picture

I want to vote it down because it's true, but I vote up because it's right.  F**K!!!

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