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

Tyler Durden's picture




 

Actually that title was misleading: there will be no disclosure of "how", because we don't know. What we do know is that thanks to the magic of JPM's definition of "Mark-To-Market" accounting, a $5 million prop trading loss (and thus forbidden by the Volcker Rule) funded by depositor cash as it took place in the infamous CIO unit whose job was to manage "excess deposits" in a prudent manner, became a $400 million prop trading loss in the span of 88 minutes. But not during trading - the market was long closed. The adjustment was purely on paper.

From the JPM Task force report on the CIO "London Whale" fiasco, as referenced yesterday:

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.

And that, ladies and gentlemen, is how "mark-to-market" is implemented in the current commercial bank prop trading units - through a "confrontation between traders."

We learn all this in the Task Force report. What we don't learn is why there was a confrontation, what was the basis for the mismarking, and most importantly, how it is possible that in JPM's wacky Schrodinger world, a Marked to Market loss can be $5 Million and $400 Million at the same time, depending on who a "confrontation" takes place between. Perhaps in JPM, Mark to Muscle is a more appropriate estimation of what is going on.

Why should readers care? Because this 80-fold delta in potential losses is funded, and thus impacts, something dear to all those who have savings at JPM. Their money. Money, which should not be used to speculate in fashion that means an a full wipe out of capital is purely in the eye of the beholder.

What it also means for all other "mark to market" estimates of JPM, and all other banks' profitability, we leave to readers to infer.

Finally, some much more deserved criticism of the JPM's Task Force "report" comes from Bloomberg's Jon Weil:

[H]ow did JPMorgan’s chief investment office, which manages deposits that the bank hasn’t lent, go from being a conservatively run risk manager to a profit center speculating on higher-yielding assets such as credit derivatives? The company’s report, conveniently, said this pivotal question was outside the inquiry’s scope. It’s worth noting that it was Dimon who pushed for the transformation several years ago, as Bloomberg News reported last spring.

 

“Although the task force has reviewed certain general background information on the origin of the synthetic credit portfolio and its development over time, the task force’s focus was on the events at the end of 2011 and the first several months of 2012 when the losses occurred,” the report said.

 

The head of the task force that produced the report, Michael Cavanagh, is the co-CEO of JPMorgan’s corporate and investment bank. So it isn’t as if there was a pretense that this was some sort of independent review. The company didn’t disclose the task force’s other members.

 

The report dodged important disclosure issues. The facts in the report suggest there were serious shortcomings before 2012 in the internal controls over JPMorgan’s valuation processes. Some employees manipulated the numbers to make the trading losses look smaller. And when JPMorgan restated its first- quarter 2012 results last summer, the company acknowledged it had a material weakness in its controls as of March 31. Yet the bank hasn’t amended past disclosures to show control weaknesses in any earlier periods. Why not? This week’s report didn’t address the question.

 

Another example: During an April 13 call with analysts, about a month before JPMorgan began acknowledging the magnitude of its losses, Douglas Braunstein, JPMorgan’s since-demoted chief financial officer, said “those positions are fully transparent to the regulators” and that the bank’s regulators “get the information on those positions on a regular and recurring basis as part of our normalized reporting.” The statement wasn’t credible then. There’s no reason to believe he had any basis for the remark. Yet the task force’s report didn’t touch it.

 

The report also included this bizarre disclaimer: “This report sets out the facts that the task force believes are most relevant to understanding the causes of the losses. It reflects the task force’s view of the facts. Others (including regulators conducting their own investigations) may have a different view of the facts, or may focus on facts not described in this report, and may also draw different conclusions regarding the facts and issues.” In other words, we haven’t been told the whole story.

And this is the opacity that one gets when a firm sets off to expose what should otherwise be perfectly public information in the first place. One does start to wonder: if America's banks go to such great lengths to mask how ugly the behind the scenes truth really is, is the true undercapitalization of the US banking sector in the trillions... Or tens of trillions?

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Fri, 01/18/2013 - 12:44 | 3166480 cifo
cifo's picture

This is a bit hard to understand.

Fri, 01/18/2013 - 12:48 | 3166497 NotApplicable
NotApplicable's picture

All your assets are belong to us.

Fri, 01/18/2013 - 12:54 | 3166517 donsluck
donsluck's picture

At least the ones we HOLD. Lesson: hold your own.

Fri, 01/18/2013 - 13:00 | 3166527 nope-1004
nope-1004's picture

What's hard to understand about fraud?  JPM is an insolvent bank, period.  They are risking taxpayer dollars and leveraging themselves to the point of no return, as they know damn well that their incompetence will be "bailed out".  The truth is they just don't fucking care because caring requires responsibility and knowledge.

JPig has neither.

 

Fri, 01/18/2013 - 13:12 | 3166581 TheFourthStooge-ing
TheFourthStooge-ing's picture

The simple explanation is this:

for every $100 you've deposited at JPM, you owe them another $8000.

Fri, 01/18/2013 - 13:17 | 3166598 urwright
urwright's picture

it is all a game

how you you play?

Like this:  

http://www.youtube.com/watch?v=-f5S7e5G5-Q

Or this:  

http://www.youtube.com/watch?v=4AEr8LdueLo

Fri, 01/18/2013 - 13:33 | 3166635 SafelyGraze
SafelyGraze's picture

price discovery!

and even when the price is manipulated/regulated/legislation, you still have *volume* discovery

Fri, 01/18/2013 - 14:30 | 3166879 insanelysane
insanelysane's picture

Excuse me but is this piece of paper worth 5 or 400?

Please step into the Thunderdome and we will figure it out.

Fri, 01/18/2013 - 18:10 | 3167653 ajax
ajax's picture

 

Absolutely perfectly stated TheFourthStooge-ing.

From the FT Tuesday September 25th 2012:  "CDS indices gamble on swaps that do not exist"

"Wall Street financial engineers have devised a new way to combat declining trading in the credit derivatives market - they are revamping an index to add financial instruments that do not exist."

Skip to: "This week the index provider "Markit" will cross a rubicon and begin to include three companies in its North American high yield CDX index for whom no bank is offering a CDS."

 

 

Fri, 01/18/2013 - 19:52 | 3167891 TheFourthStooge-ing
TheFourthStooge-ing's picture

It's a high stakes game of bucket shop bingo where the winners win big and the non-winners are reimbursed their losses.

The losers (depositors and taxpayers) don't even know they're a part of the game.

Fri, 01/18/2013 - 13:14 | 3166586 LeisureSmith
LeisureSmith's picture

They are risking taxpayer dollars and leveraging themselves to the point of high return. Fixed it.

People say you can't eat Gold, but the public sure can and will eat losses doused in fraud sauce. Bon appetit.

Fri, 01/18/2013 - 13:15 | 3166587 Ignatius
Ignatius's picture

Millions? Oh shit, I thought they said 'billions', so I guess it's ok.

Nothing to see here folks, move on.

Fri, 01/18/2013 - 13:15 | 3166595 francis_sawyer
francis_sawyer's picture

Tylers ~ Come Monday... you can add Tom Brady & Bill Belichick to that picture collage of 'traders' with the OMG hands stuck to their faces...

~~~

Just trying to give you a 'jump' on the weekend headlines...

Fri, 01/18/2013 - 13:48 | 3166687 Panafrican Funk...
Panafrican Funktron Robot's picture

"risking taxpayer dollars"

And customer deposits!

Fri, 01/18/2013 - 12:56 | 3166528 Ghordius
Ghordius's picture

I'll try to make it simpler: JPMorgan has employees that go against the law, play with their customer's and the future bailout (taxpayer's) money and don't even know how much of it they destroy. Then they lie about it, but so badly that it's utterly idiotic and shameless

Nevertheless, their company is politically too well connected, too important to prosecute and when the next bailout is needed it's too big and "systemic relevant" to fail

now excuse me, got to puke - btw, great article, Tyler

Fri, 01/18/2013 - 13:18 | 3166599 americanspirit
americanspirit's picture

Brilliant summary Ghordius

Fri, 01/18/2013 - 13:28 | 3166623 Ghordius
Ghordius's picture

thanks. apparently JPMorgan brings the best out of me - and my lunch, too

how long until we all realize that those Financial Tyrex are shitting all over the planet? this is not a trickle, you know?

break up whatever is above the law - works with tyrants, works with MegaloBanks

Fri, 01/18/2013 - 14:33 | 3166889 insanelysane
insanelysane's picture

I'm sure we'll get a heart felt apology and a bunch of new laws to protect us. <sarc^88>

Fri, 01/18/2013 - 18:18 | 3167683 ajax
ajax's picture

 

I repeat:

From the FT Tuesday September 25th 2012:  "CDS indices gamble on swaps that do not exist"

"Wall Street financial engineers have devised a new way to combat declining trading in the credit derivatives market - they are revamping an index to add financial instruments that do not exist."

Skip to: "This week the index provider "Markit" will cross a rubicon and begin to include three companies in its North American high yield CDX index for whom no bank is offering a CDS."

Fri, 01/18/2013 - 12:58 | 3166532 AlaricBalth
AlaricBalth's picture

What do you mean "hard to understand'? /sarc

 By using a copula function (e.g., Gaussian copula), the CDS pricing model assumes a joint distribution of x1 and x2 that is bivariate normal. The “magic” of the Gaussian copula is to take as inputs marginal (unconditional) distributions and return, via the copula function, a multivariate normal distribution. Marginal distributions are “joined” via a copula function.

How many times must I explain it. Now where is my bonus???

Fri, 01/18/2013 - 13:09 | 3166569 Ghordius
Ghordius's picture

excellent explanation, you just remember me about something: stop CDS copulation

ban that hideous stuff that belongs in proper sin-taxed casinos, not in banks

Fri, 01/18/2013 - 18:21 | 3167691 ajax
ajax's picture

 

and I repeat (for the last time):

From the FT Tuesday September 25th 2012:  "CDS indices gamble on swaps that do not exist"

"Wall Street financial engineers have devised a new way to combat declining trading in the credit derivatives market - they are revamping an index to add financial instruments that do not exist."

Skip to: "This week the index provider "Markit" will cross a rubicon and begin to include three companies in its North American high yield CDX index for whom no bank is offering a CDS."

Fri, 01/18/2013 - 13:22 | 3166600 qqqqtrader
qqqqtrader's picture

I get it...

$700MM loss on paper (which never happened)

$300MM profit in real (which did happen)

$300MM - $700MM = -$400MM (ummm, don't know what to call this)

$400MM(LOSS) - $300MM(PROFIT) = -$100MM 

Soooooooo... $100MM (loss on paper) = $100MM tax credit...  the Govt owes/gives them more $$$

Fri, 01/18/2013 - 13:50 | 3166698 perchprism
perchprism's picture

 

It's impossible to follow.   One trader said boo to another trader, then got mad at the third trader, while the latter trader came and predicted 5 million so the former trader and the fourth trader traded trading cards.

 

 

Fri, 01/18/2013 - 15:17 | 3167100 Silver Bully
Silver Bully's picture

'This is a bit hard to understand.'

One trillion, 10 trillion, what's an extra zero (or three thousand) between friends right? We're all in this together! We're just in this more than you, muppet. Its a big club . . .

Fri, 01/18/2013 - 16:22 | 3167311 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

It's pretty simple. They stole money from you, me, our kids, and our grandkids. There used to be police who would stop thieves like this but there aren't any more. There also used to be a government that would hire police and make sure they did their job, but it's gone too. It's been purchased by the thieves and now works for them, not us. Any questions?

Fri, 01/18/2013 - 16:38 | 3167350 EscapingProgress
EscapingProgress's picture

"...is the true undercapitalization of the US banking sector in the trillions... Or tens of trillions?"

Answer: hundreds of trillions

Fri, 01/18/2013 - 12:45 | 3166483 Budd aka Sidewinder
Budd aka Sidewinder's picture

Oprah: Jamie, we're going to start this interview with yes and no questions, ready?

Jamie: Yes

Oprah: Are you a lying sack of shit scumbag that should be getting gang banged ass raped in a federal pound me in the ass prison?.......

Fri, 01/18/2013 - 13:07 | 3166554 moonman
moonman's picture

Jamie: Yes PLEASE!!!!

Fri, 01/18/2013 - 12:46 | 3166485 Xibalba
Xibalba's picture

Truth is treason in the empire of lies - Ron Paul

Fri, 01/18/2013 - 12:48 | 3166491 dbTX
dbTX's picture

What's the difference, $400 or $700 mil, the FED has more than likely covered it.

Fri, 01/18/2013 - 12:48 | 3166498 tickhound
tickhound's picture

These dayz, things like this are easily dismissed as "witch hunts."

Fri, 01/18/2013 - 12:49 | 3166500 Cognitive Dissonance
Cognitive Dissonance's picture

Mark to Market means whatever you want it to mean.

Fri, 01/18/2013 - 15:42 | 3166504 AlaricBalth
AlaricBalth's picture

Yup!

Mark to Market = Mark to CMA (cover my ass)  ;-)

Fri, 01/18/2013 - 12:52 | 3166512 Cursive
Cursive's picture

@Cog Dis

Just numbers on a piece of paper. The essence of fiat.

Fri, 01/18/2013 - 14:00 | 3166728 Cognitive Dissonance
Cognitive Dissonance's picture

Actually more like one's and zero's on a RAM chip.  :)

Power failure. Now what do we do? Oh well, guess we just start all over again.

Fri, 01/18/2013 - 13:06 | 3166551 falak pema
falak pema's picture

the whole thingie about markets is each protagonist choses his risk to return profile that the market then appraises and salutes or condemns. In a manipulted market it only goes one way : the way the monopolies want it to; your risk return profile has no meaning per se, as the market has no free will nor true intelligence. blind and mute! 

Fri, 01/18/2013 - 13:10 | 3166572 Cognitive Dissonance
Cognitive Dissonance's picture

"In a manipulted market it only goes one way : the way the monopolies want it to....."

(Mark to) markets don't move, they are moved.

Fri, 01/18/2013 - 13:41 | 3166642 falak pema
falak pema's picture

yep, but there is no penalty if you don't move the mark, when you "make" the market. Whereas for the small guy who "takes" the market he is left totaly out in the cold (when he shorts the asset for not having been marked correctly). 

Riskless markets with no urgency for some and risky as hell for others. 

Fri, 01/18/2013 - 14:03 | 3166738 Cognitive Dissonance
Cognitive Dissonance's picture

Just the way they like it.

Rigged in their favor.

Fri, 01/18/2013 - 14:08 | 3166762 falak pema
falak pema's picture

apparently inspite of their impressive monetary power they still make panicky plays like this one; when you run out of bubbles to blow up you lose your grip on your already bloated P& L.

Fri, 01/18/2013 - 18:41 | 3167746 AlaricBalth
AlaricBalth's picture

Yes but in a Level 3 asset, such as a CDS, price discovery is limited or non existent therefore the asset is marked to fantasy.

Fri, 01/18/2013 - 13:48 | 3166684 Pairadimes
Pairadimes's picture

It means "mark to amount that optimizes my bonus calculation."

Fri, 01/18/2013 - 12:50 | 3166503 The_Dude
The_Dude's picture

Is there no honor amoung thieves?

Fri, 01/18/2013 - 15:06 | 3167052 exi1ed0ne
exi1ed0ne's picture

They're more guidelines than actual rules.

 

PARLEY!

Fri, 01/18/2013 - 18:57 | 3167785 ajax
ajax's picture

 

@The_Dude

  "Is there no honor amoung thieves?"

 

   NO,  not since you dropped the u in honour - put it back in.  HONOUR

 

 

Fri, 01/18/2013 - 20:11 | 3167940 the misanthrope
the misanthrope's picture

yes, but don't you see - he put the dropped u in among - so undude like.

Fri, 01/18/2013 - 12:51 | 3166507 Seasmoke
Seasmoke's picture

as hard as he might try, Dimoned will NEVER catch on ........it will always be Corzined !

Fri, 01/18/2013 - 12:52 | 3166509 Nid
Nid's picture

Under Capitalization? Is there an algo trading that?

 

The Market used to care about and discount elements such as these....now, no one cares about suce trivial matters as under capitalization.

Fri, 01/18/2013 - 12:52 | 3166511 Inthemix96
Inthemix96's picture

Is it any wonder people like me want these fuckers pulled outside, lined up against a wall and shot?

No fucking accountability for any type of behavior, no matter how it affects the public at large?

These fuckers are beyond the sublime, because they are are beyond the law.  This needs to be changed.  These fucking idiots need a DETERENT, a DETERENT that will stop this filthy, fucking corrupt behavior.  Fucking yesterday.

Cunts, each and every one of them.

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