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When A JPM "Hedge" Is Anything But A Hedge - In JPM's Own Words
While JPMorgan's arrogance and complete ignorance (intentional or not) of both risk limits and regulatory expectations is now grossly obvious, the fact remains that a lie is a lie and given the following, how can anyone ever trust anything that anyone from this 'fortress-like' balance sheet ever says again? To wit, again and again and again, the public and the regulators were told this was a long-term 'hedge' for a bank that is a natural net 'lender' and therefore exposed to deterioration in credit markets over the long-term. However, as JPMorgan's own data and words show, the SCP 'hedge' in fact lost money in all spread-widening scenarios - exactly when it should be making money to cover 'offsetting' losses in the bank's lending book. In fact, it appears, that this was simply another low 'risk-weighted' way to get around regulatory capital rules and be 'long' the market - in the first three months of 2012, the CIO tripled the size of the SCP book, taking it from $51 billion to $157 billion, in a buying spree that was not motivated by decision-making on a “very long-term basis.”
"It's A Hedge"...
On May 10, Mr. Dimon continued to mis-characterize the SCP as a “hedge."
Mr. Braunstein told the Subcommittee that the SCP book could both be long and provide a “fat tail hedge.”
during the interview with Mr. Dimon, JPMorgan Chase’s General Counsel denied that Mr. Braunstein had characterized the SCP book as a hedge during the April earnings call
"A Hedge For What?"...
Mr. Braunstein explained to the Subcommittee that JPMorgan Chase, by its very nature as a bank which loans money, was “long” credit, because when credit deteriorated, the bank lost money.
"Scenario Analysis Showed SCP Was Not a Hedge"...
ZH - while it appears the risk and trading groups 'believed' the SCP to be a highly convex tail-risk-hedge, it wasn't
The statements by Mr. Braunstein and Mr. Dimon were also contradicted by an internal bank analysis that both received two days before the earnings call. That analysis clearly depicted the SCP as in a long posture and likely to lose money in a negative credit environment – which meant it was not operating as a hedge to offset the bank’s other credit risks.
On April 11, 2012, an internal CIO presentation prepared for senior management including Messrs. Dimon and Braunstein, reinforced Ms. Drew’s April 5 characterization of the book as long. The presentation was prepared by the CIO traders with input from the head of JPMorgan Chase’s Model Risk and Development Group, as well as his deputy, who had previously been a credit trader in the Investment Bank.
On page 3 of that presentation, entitled “Synthetic Credit Summary: Risk & P&L Scenarios,” reprinted below, a table showed that in multiple credit spread widening environments – i.e., situations in which credit deteriorated and the risk of default increased – the SCP would lose money.
Table via Page 284/307 in the report here
ZH - What you see here is a report that states that when credit spreads widen (or credit conditions deteriorate) the SCP 'hedge' - instead of increasing in value and providing hedge 'profit' for the underlying bank's loan book losses - actually loses money! It is a net long credit position...
"And Was Getting Longer Credit (less and less a tail-risk hedge)..."
Overall, in the first three months of 2012, the CIO tripled the size of the SCP book, taking it from $51 billion to $157 billion, in a buying spree that was not motivated by decision-making on a “very long-term basis.” When asked about these types of trades, JPMorgan Chase conceded to the Subcommittee that the SCP book was “actively” traded
"But It Must Be A Hedge Or JPMorgan Was Breaking The Volcker Rule's proposals..."
Among other criticisms, JPMorgan Chase’s comment letter expressed concern that the Volcker Rule’s proposed regulation might not permit the CIO to continue to manage the Synthetic Credit Portfolio. The comment letter stated: “Under the proposed rule, this activity [i.e., credit derivatives] could have been deemed prohibited proprietary trading.”
In addition, when Ina Drew provided briefing materials to Mr. Braunstein the day before the earnings call, she provided no support for the notion that the synthetic credit trades would be permitted under the Volcker Rule.
She sent him a “Questions and Answers” document, and with respect to the Volcker rule, wrote: This analysis directly contradicts Mr. Braunstein’s statement during the earnings call that the bank had concluded that the SCP would be found to be “consistent with” the Volcker Rule.
Or did JPMorgan's executives simply follow the new normal ethical stance preached by J-C Juncker - "When it becomes serious, you have to lie."
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So what, Tylers? Jamie Dimon of The JP Morgue is flipping the bird at you while sipping martinis with The Bernank at Il Mulino..........
It's clear as day in the report that Dimon (and other senior management) were lying publicly (securities fraud anyone??) to protect their positions. There's hilarious correspondence where the guy Javier from the CIO explains how the publicity campaign seems to be working well.
Will be interesting how that is played tomorrow...
So fukin' what??? Mozillo is walking around an island working on his tan, Corzine is raising money for libs, blah blah blah blah......lying to investors, CONgress, etc is acceptable so long as the every two years campaign contributions continue to grow at a healthy clip....and what the fck ever happened to Chris Dodd? Mozillo blew him with sweetheart mortgage deals and he's still "respected"......
The senate report nails them to the wall, unfortunately it's up the media and the folks in congress to utilize the report to make that happen.
Fact that Dimon isn't even going to be there tomorrow and the TV media will treat the whole thing with kid gloves doesn't give much faith. But it's all there if people were to actually use the information.
The bottom line is that the SCP, as a whole, was not a hedge. It was net long and was projected to lose money when the credit markets worsened. In the April 11 presentation,information on pages 3, 5, and 7 predicted gain or loss figures for the entire synthetic credit portfolio, and showed that the bank itself predicted that the SCP would lose money in credit stress scenarios, thereby amplifying the bank’s losses, rather than hedging, offsetting, or providing stress loss protection against them. Mr. Braunstein and Mr. Dimon reviewed that information two days before the earnings call, yet they told investors on April 13 that the SCP was a hedge. Mr. Dimon repeated that description on May 10, even though by then he knew even more details of the SCP and knew, as he later put it, the SCP had “morphed” into something else.
You know what? You're right. Let's get Eric Holder on it.......
Title 18, United States Code, Section 1001 makes it a crime to: 1) knowingly and willfully; 2) make any materially false, fictitious or fraudulent statement or representation; 3) in any matter within the jurisdiction of the executive, legislative or judicial branch of the United States. A misleading statement, or as the Congressional Subcommittee repeatedly states "misinforming" does not even have to be made directly to an employee of the federal government as long as it is "within the jurisdiction" of the federal bureaucracy. It is understood that the misinformation must be "material". However, this requirement is met if the statement has the "natural tendency to influence or [is] capable of influencing, the decision of the decisionmaking body to which it is addressed." United States v. Gaudin , 515 U.S. 506, 510 (1995). ( It is not necessary to show that the lie in question ever actually influenced anyone.) Although knowing that a statement is false at the time it is made is enough for an indictment. In order to be guilty of this crime, an individual does not have to know that lying or misinforming to the government is a crime or even that the matter you are lying about is "within the jurisdiction" of a government agency or regulatory body. United States v. Yermian , 468 U.S. 63, 69 (1984).
In the case of JPMorgan, there is clearly enough evidence to garner multiple indictments, from the junior trader in charge of pricing, all the way to the Executive offices. This report, without a doubt, proves a systemic attempt to mislead and defraud. It's a shame that anyone at the SIFI's are too big to jail.
So when Bernanke says the purpose of QE is to improve employment he is committing a crime?
No one is going to read a 300 page report, especially not Congress.
It's not that bad a read, most of it is supporting evidence. The gist of the thing is:
CIO takes a long position in credit derivatives, the position is so big it starts to set off their bank wide risk limit (CIO apparently had no actual risk officer)
The CIO wants a new risk model explicitly designed to lower their risk #s (ostensibly the old model overplayed risk) and thus no longer set off the alarm bells. Math genius is brought in to do the job and before testing the new model they imm. start using it after approval directly from Dimon. New model shows guess what, there's very little risk in these positions!
Conveniently they are now able to greatly expand their bets and things start to get out of control. In order to keep everyone happy they start mis marking their losses against their own investment bank book values and then things really get nutty.
Eventually press gets wind of this massive position and Dimon + folks come out to explain that it's just a hedge and nothing to worry about they're fully transparent on the whole deal. The traders use this good publicity to wind down their positions.
Everyone at the bank claims they had no idea what was going on, traders are fired and head of CIO resigns.
Heads should roll at the Office of the Comptroller of the Currency. Their lax oversight of JPM's activities bordered on criminality. The problem with the OCC regulators was they had a complete lack of understanding of the machinations within the JPM CIO. Either they did not know what questions to ask, which shows ignorance, or they didn't want to make waves due to the fact that the OCC has been a revolving door to a job with the big banks.
The OCC seemed to have a very good understanding of what was going on.....after they were allowed to look at the shit!
"While conducting its review of the SCP, some OCC examiners expressed skepticism that the SCP functioned as a hedge at all. In a May 2012 internal email, for example, one OCC examiner referred to the SCP as a “make believe voodoo magic ‘composite hedge.’”
How did Dimon get away with that? And the fact that they didn't disclose moving to a new Var model... questions questions.
Another amazing thing, the JPM group of lunatics are supposed to be grade AAA risk managers. Could you imagine BAC?
One other thing that's striking - imagine if their lies hadn't of been successful? The amount of damage to JPM would've been colossal. And by extension the financial market. Maybe another Lehman?
To think the whole system is so fragile and we have to rely on these crazed lunatics ability to convincingly lie otherwise it's over the edge?
From now on the CEO of every major bank should be an academy award winning actor, if that's what it takes to keep the whole thing afloat, get it done!
Maxine Waters might. She's gotta find somewhere where it was stated that "170 million Americans will lose their jobs from the secrester."
It's all "nominal" these days Tyler. How does 8.5k ~ 2.3m , become a 46k ~ 1m differential?
Market discovery? Fair value? > Somebody >Van Halen - Van Halen II - Somebody Get Me A Doctor - YouTube<
Too big to fail, too big to jail, too big to fear regulatory scrutiny...isn't this monopoly behavior?
When we get a Justice Department back, would someone look into this?
But now perhaps Dimon can join Corzine in jail. Oh.....never mind.
Excellent.
ZH nailing the Jello to the Wall. Not easy, but it sure is fun to watch.
Yes, a great series these JPM articles.
Articles like these is what makes ZH site incomparable.
Fucking absolutely intentional ......Pride goes before the fall
Do not give the cocksuckers the benefit of the doubt ever again
Nobody's going to touch Jamie or JPM. You wonder why he acts like such an arrogant prick? Because he knows he's untouchable.
He is faster than a speeding bullet ?
No, but I bet his bodyguards have plenty of them ready 24/7..........
There were many untouchables in history who were eventually arested or hung.
{ risk weighted} ? {actively traded} = Discovery> sarc
Why do stories like these always manage to show up right before expiry? I guess we needed a reason for a sell-off tomorrow.
THIS is the sort of story to which ZH should confine itself. Useful technical insight.
But please, no more sermons!!!! We KNOW what moral/legal/social/political/economic conclusions to draw from the research. Just lay it out as above.
I hear the Morgue has moved into copper. How do you attack them there to make money? Holder's protecting them from prosecution but you can still make lots of money out-running the whales.
What is "SCP" - please anyone?
C'mon.
Angelo walks
Corzine walks
Dimon skips
Lloyd? Yeah right.
HAHAHAHA
Anyone spot a trend?
Nothin will ever happen to Master Dimon
A little old Jewish guy bearing gold will show up at the door of every congressman. This story won't see the light of day.
5 JPM articles on the trot? Tyler must smell blood...
'an arcane 'New World Order', quite liken that of a bathos homogeneous 'Ancien`Regime'... a latent enlightenment of sorts, but having a dire and predictable occident' fait`accompli rhyming requiem?!'
a cantankerous symbiosis of plausible [ http://en.wikipedia.org/wiki/Plausible_deniability ] deniability and constructive [ http://en.wikipedia.org/wiki/Constructive_ambiguity ] ambiguity, whence futility reigns supreme metastasizing rabid degeneration... feeding off incestual [mal?]attrition?!
thankyou Tyler
The end is near, bitchez.
This is clearly ELITE INFIGHTING.
As Janet Tavakoli said to Chris Martenson, Dimon does NOT (hold your breath there), again he does NOT understand derivatives.
That would mean that he got that job not because of his skills, but because of his ego. Somebody gave him that job.
This has been going on for a long time. Many people resigned "honorably", but Dimon remained. The ones against him seem determined to put him down.
Let's see. There seem to be two factions inside JPM. Who's going to win? What do these factions represent?
probably not, but Lady Blythe does. they're her black bastard babies.
speaking of which, a Tavakoli vs. Masters derivatives death match would be epic.
No senior manager at any major banking institution (with the possible exception of Brady Dougan) understands the more esoteric and dangerous derivatives. One can add to that list of the ignorant most risk managers. The math is beyond them, and most have been sold a bill of goods by bonus-driven traders, many of whom suffer from bouts of the Downing Effect regarding their own ability to quantify and qualify tail risk, correlations, and liquidity. The ones who are fully cognizant of these things are just hoping to get lucky from now until bonus season.
fuck J.P.Morgan
tired of hearing about his rotted corpse and the golem he spawned.
I've been up for 36 hours. Anything anyone says, is above my
paygrade
Dimon does not manage. He doesn't know how to manage. He's not supposed to manage.
Dimon....rules!
Rulers usually do not have happy ends.
Bernanke has issued a statement on JPMorgan and Jamie Dimon.
https://www.facebook.com/photo.php?fbid=494990697224460&set=a.4195375847...
When is "cash management" no longer cash management? When is a hedge not really a hedge? What constitutes a systemically risky institution? Is a bonus-driven culture a good thing in a public deposit-taking institution? When is QE demonstrably too much, even assuming it was ever necessary in the first place?
Reasonable people might debate these questions, or where the crossover points exist, but no reasonable person can argue JPM hasn't provided answers to each and every one. The very presence of $400 billion in excess of deposits over loans, and in an institution where both traders and management are bonus-driven, is the smoking gun that either answers the questions or points to answers. That a supposedly "well-managed" institution, given every possible and arguably unfair advantage to succeed, can still suffer nearly a ten billion loss ostensibly managing its cash position, is the best argument possible for both limiting bank size and reinstituting Glass Steagall. That argument, of course, will go unheeded.
Maybe all the questions regarding the whale trade will finally be answered just after Dimon explains how he was able to arrange, wearing both the hat of JPM CEO and Chairman of the Board of Directors of the NYFed, the "sale" of BSC to JPM for (initially) $2/share---all after somehow issuing a sufficient number of new shares of BSC, on a weekend, so that when JPM bought all of them, JPM then held a majority interest in BSC and could approve its sale to JPM. Shareholder rights will never be the same until that incident is more fully explained.
damn fine argument for having a store of wealth that doesn't require a counterparty you made there chindit.
You mean like farmland?...with an aquifer?...located in a temperate zone?.....far from the madding crowd?....okay, okay...that sits at the end of a Yellow Brick Road (if you insist)?
I'm still trying to rework Groucho's old line, but the best I can muster is "I fear belonging to any faith that would accept me as a believer". When I hear rumors of generational holders of an asset unloading, I begin to think Nietzsche needs an "L".
if that farmland had allodial title, absolutely.
there's no place like home.
Maybe all the questions regarding the whale trade will finally be answered just after Dimon explains how he was able to arrange, wearing both the hat of JPM CEO and Chairman of the Board of Directors of the NYFed, the "sale" of BSC to JPM for (initially) $2/share---all after somehow issuing a sufficient number of new shares of BSC, on a weekend, so that when JPM bought all of them, JPM then held a majority interest in BSC and could approve its sale to JPM.
I'm sure they'll sort that out right after BAC - Merrill Lynch.
a trio of shooters with mka 1919's shooting sabot could take out anyone and their bodyguards, no matter what they are wearing.
Just one simple question:
Why the !@#$ does Wall Street finance have to be THIS complicated?
I've discovered it's quite simple.
One invents something, then everybody places bets on it.
The strange thing about it, is that they place bets without having any money.