The Fed Sends A Frightening Letter To JPMorgan, Corporate Media Yawns

Tyler Durden's picture

Submitted by Pam Martens and Russ Martens via,

Yesterday the Federal Reserve released a 19-page letter that it and the FDIC had issued to Jamie Dimon, the Chairman and CEO of JPMorgan Chase, on April 12 as a result of its failure to present a credible plan for winding itself down if the bank failed. The letter carried frightening passages and large blocks of redacted material in critical areas, instilling in any careful reader a sense of panic about the U.S. financial system.

A rational observer of Wall Street’s serial hubris might have expected some key segments of this letter to make it into the business press. A mere eight years ago the United States experienced a complete meltdown of its financial system, leading to the worst economic collapse since the Great Depression. President Obama and regulators have been assuring us over these intervening eight years that things are under control as a result of the Dodd-Frank financial reform legislation. But according to the letter the Fed and FDIC issued on April 12 to JPMorgan Chase, the country’s largest bank with over $2 trillion in assets and $51 trillion in notional amounts of derivatives, things are decidedly not under control.

At the top of page 11, the Federal regulators reveal that they have “identified a deficiency” in JPMorgan’s wind-down plan which if not properly addressed could “pose serious adverse effects to the financial stability of the United States.” Why didn’t JPMorgan’s Board of Directors or its legions of lawyers catch this?

It’s important to parse the phrasing of that sentence. The Federal regulators didn’t say JPMorgan could pose a threat to its shareholders or Wall Street or the markets. It said the potential threat was to “the financial stability of the United States.”

That statement should strike fear into even the likes of presidential candidate Hillary Clinton who has been tilting at the shadows in shadow banks while buying into the Paul Krugman nonsense that “Dodd-Frank Financial Reform Is Working” when it comes to the behemoth banks on Wall Street.

How could one bank, even one as big and global as JPMorgan Chase, bring down the whole financial stability of the United States? Because, as the U.S. Treasury’s Office of Financial Research (OFR) has explained in detail and plotted in pictures (see below), five big banks in the U.S. have high contagion risk to each other. Which bank poses the highest contagion risk? JPMorgan Chase.

The OFR study was authored by Meraj Allahrakha, Paul Glasserman, and H. Peyton Young, who found the following:

“…the default of a bank with a higher connectivity index would have a greater impact on the rest of the banking system because its shortfall would spill over onto other financial institutions, creating a cascade that could lead to further defaults. High leverage, measured as the ratio of total assets to Tier 1 capital, tends to be associated with high financial connectivity and many of the largest institutions are high on both dimensions…The larger the bank, the greater the potential spillover if it defaults; the higher its leverage, the more prone it is to default under stress; and the greater its connectivity index, the greater is the share of the default that cascades onto the banking system. The product of these three factors provides an overall measure of the contagion risk that the bank poses for the financial system.”

The Federal Reserve and FDIC are clearly fingering their worry beads over the issue of “liquidity” in the next Wall Street crisis. That obviously has something to do with the fact that the Fed has received scathing rebuke from the public for secretly funneling over $13 trillion in cumulative, below-market-rate loans, often at one-half percent or less, to the big U.S. and foreign banks during the 2007-2010 crisis. The two regulators released background documents yesterday as part of flunking the wind-down plans (living wills) of five major Wall Street banks. (In addition to JPMorgan Chase, plans were rejected at Wells Fargo, Bank of America, State Street and Bank of New York Mellon.) One paragraph in the Resolution Plan Assessment Framework and Firm Determinations (2016) used the word “liquidity” 11 times:

“Firms must be able to reliably estimate and meet their liquidity needs prior to, and in, resolution. In this regard, firms must be able to track and measure their liquidity sources and uses at all material entities under normal and stressed conditions. They must also conduct liquidity stress tests that appropriately capture the effect of stresses and impediments to the movement of funds. Holding liquidity in a manner that allows the firm to quickly respond to demands from stakeholders and counterparties, including regulatory authorities in other jurisdictions and financial market utilities, is critical to the execution of the plan. Maintaining sufficient and appropriately positioned liquidity also allows the subsidiaries to continue to operate while the firm is being resolved. In assessing the firms’ plans with regard to liquidity, the agencies evaluated whether the companies were able to appropriately forecast the size and location of liquidity needed to execute their resolution plans and whether those forecasts were incorporated into the firms’ day-to-day liquidity decision making processes. The agencies also reviewed the current size and positioning of the firms’ liquidity resources to assess their adequacy relative to the estimated liquidity needed in resolution under the firm’s scenario and strategy. Further, the agencies evaluated whether the firms had linked their process for determining when to file for bankruptcy to the estimate of liquidity needed to execute their preferred resolution strategy.”

Apparently, the Federal regulators believe JPMorgan Chase has a problem with the “location,” “size and positioning” of its liquidity under its current plan. The April 12 letter to JPMorgan Chase addressed that issue as follows:

“JPMC does not have an appropriate model and process for estimating and maintaining sufficient liquidity at, or readily available to, material entities in resolution…JPMC’s liquidity profile is vulnerable to adverse actions by third parties.”

The regulators expressed the further view that JPMorgan was placing too much “reliance on funds in foreign entities that may be subject to defensive ring-fencing during a time of financial stress.” The use of the term “ring-fencing” suggests that the regulators fear that foreign jurisdictions might lay claim to the liquidity to protect their own financial counterparty interests or investors.

JPMorgan’s sprawling derivatives portfolio that encompasses $51 trillion notional amount as of December 31, 2015 is also causing angst at the Fed and FDIC. The regulators wanted more granular detail on what would happen if JPMorgan’s counterparties refused to continue doing business with it if rating agencies cut its credit ratings. The regulators asked for a “narrative describing at least one pathway” for winding down the derivatives portfolio, taking into account a number of factors, including “the costs and challenges of obtaining timely consents from counterparties and potential acquirers (step-in banks).” The regulators wanted to see the “losses and liquidity required to support the active wind-down” of the derivatives portfolio “incorporated into estimates of the firm’s resolution capital and liquidity execution needs.” 

According to the Office of the Comptroller of the Currency’s (OCC) derivatives report as of December 31, 2015, JPMorgan Chase is only centrally clearing 37 percent of its derivatives while a whopping 63 percent of its derivatives remain in over-the-counter contracts between itself and unnamed counterparties. The Dodd-Frank reform legislation had promised the public that derivatives would all become exchange traded or centrally cleared. Indeed, on March 7 President Obama falsely stated at a press conference that when it comes to derivatives “you have clearinghouses that account for the vast majority of trades taking place.”

But the OCC has now released four separate reports for each quarter of 2015 showing just the opposite of what the President told the press and the public on March 7. In its most recent report the OCC, the regulator of national banks, states that “In the fourth quarter of 2015, 36.9 percent of the derivatives market was centrally cleared.”

Equally disturbing, the most dangerous area of derivatives, the credit derivatives that blew up AIG and necessitated a $185 billion taxpayer bailout, remain predominately over the counter. According to the latest OCC report, only 16.8 percent of credit derivatives are being centrally cleared. At JPMorgan Chase, more than 80 percent of its credit derivatives are still over-the-counter.


Wall Street Mega Banks Are Highly Interconnected: Stock Symbols Are as Follows: C=Citigroup; MS=Morgan Stanley; JPM=JPMorgan Chase; GS=Goldman Sachs; BAC=Bank of America; WFC=Wells Fargo.

Wall Street Mega Banks Are Highly Interconnected: Stock Symbols Are as Follows: C=Citigroup; MS=Morgan Stanley; JPM=JPMorgan Chase; GS=Goldman Sachs; BAC=Bank of America; WFC=Wells Fargo.


Three of the five largest U.S. banks (JPMorgan Chase, Bank of America and Wells Fargo) have now had their wind-down plans rejected by the Federal agency insuring bank deposits (FDIC) and the Federal agency (Federal Reserve) that secretly sluiced $13 trillion in rollover loans to the insolvent or teetering banks in the last epic crisis that continues to cripple the country’s economic growth prospects. Maybe it’s time for the major newspapers of this country to start accurately reporting on the scale of today’s banking problem.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
JRobby's picture

Dimon: "We are too big to fail! Fuck you and your letter!"

Cognitive Dissonance's picture

"Make me no longer be a substantial risk to the US (global) economy. I dare you. I double dare you." Jamie (the school yard bully) Dimon

Nobody move or the Sheriff economy gets it.

ParkAveFlasher's picture

Included with the letter was a new pair of cufflinks.

MillionDollarBonus_'s picture

All primary dealer banks are classed as Systemically Important Financial Institutions (SIFIs), meaning that their failure would be an existential threat to our economy. We need to protect these institutions no matter what, for if we fail to do so we may find ourselves without a job, without a house and no money in the bank. Banks control our money supply, and money is the essence of the economy. Without banks, the money stops flowing, and without money, the economy dies.

Pinto Currency's picture



The Fed itself is a threat to the financial stability of the United States.

Theonewhoknows's picture
Theonewhoknows (not verified) Pinto Currency Apr 15, 2016 10:43 AM

Clear example of Bubblenomics made by FED. It's not like the system is rigged by itself - they did it and let others do it. To save ourselves it would be good idea to have some central bank-proof portfolio and this may be the entry point to actually not sinking with the stock exchange

Momauguin Joe's picture

All your politicians belong to us. 

pods's picture

Jamie's got a gun.  

Is this news that JPM has the US by the balls?  I would think it is common knowledge that most big banks cannot be wound down.

Hell, we cannot even have rates rise more than a quarter point or everyone pees themselves.


knukles's picture

The Establishment is for Hilda.  The Media is The Propaganda Mechanism of the Establishment.  The Banks Fund the Establishment.
Hence, no Negative Media Discussion of the Establishment's Funding Enablers.

GadExp's picture

One more brick in the propaganda movement to prepare the public psyche for a too-big-to-fail-bank massacre.

The roller coaster car USA (and subsequently the world) has crested the peak and begun its plunge into oblivion!


May Heaven have mercy on our 7 Billion poor souls!

Fukushima Sam's picture

I don't know if Jamie Dimon is a goat fucker.  He could be!

CuttingEdge's picture

Sorry to disappoint.

He's just a venal cunt.


weburke's picture

So, the elite families that own the fed dont want lesser families looking to them for help that would lessen their power and money.

bwh1214's picture

They use an awful lot of words to explain what should only take three: Critical Mass Default!

Arnold's picture

Economists are paid by the word, clearly.

Money Boo Boo's picture

Egotarianism clearly beats the fuck out egalitarianism every fucking time......

eatthebanksters's picture

What the Fed hasn't figured out is that as long as JPM is a threat to the world financial system they will get what they want.  As soon as they tow the line they lose Janet, what the fuck are you gonna do?  That's what happens when you don't prosecute and jail these fucking criminals.

Spigot's picture

Wondering what this is really about. Is it cover? Is it another sign of fracture within TPTB? Public notice that the big banks have failed to provide cover?

It should have been obvious to anyone with two firing neurons that TPTF banks are interconnected, and pose a risk to the financial system. OK, so someone came up with a bright idea to have the banks provided crisis planning. We do that for sewerage plants every day, so why not banks (note to banks, go to the sewerage department, they may have a template for you).

The problem at this point is not solvable. The fantasy of "Tier One Capital" is obviously a complete lunacy.

The system functions because of motion, nothing more. If that motion begins to falter, then there IS no financial system, regardless of the names, Boards, buildings, letterhead, etc.

Motion is faltering.

There is no crash plan that is meaningful.

Theosebes Goodfellow's picture

There is a touch of irony in that the Fed, a private cartel of banks, is admonishing one of its largest members for not having an "adequate" disaster plan despite being fully aware that all of them have massive "off-the-books" derivative exposure far greater than any plan could make cover even for a bank one onehundredth its size. "Fah-dick", (FDIC), parrots the same, also knowing that its fund is so ridiculously under funded that when the banking system finally does implode, there simply is not enough money, (paper or not), to cover all of the losses the muppets will take.

A run on JPM? Please, bitch, don't make me laugh. We're TBTF. Anyway, you'll bail us out, just like the last time. If we happen to get into trouble, all we have to do is get that Congress and President we own to pass "emergency" legislation to fund us. We are solvent the second you hand all the depositors Cypriot style bail-in haircuts. Next, please.


Fish Gone Bad's picture

People do things that interest them and they find important.  The reason there aren't credible wind down plans is because the plans are not important to the banks.  Something to think about over the weekend...

cheech_wizard's picture

You are not worthy (of mercy).

And today's new feature on ZH: Name the movie game

PRESIDENT: Sir, there wasn't much more we could have done. We were totally unprepared for this.

Standard Disclaimer: At any time, anyone could have picked up a weapon and killed off some of the bigger douchebags on the planet.
GadExp's picture

No we're not worthy based on our complacent behavior.  We have to hope for some fundamental intrinsic redeemability of human nature.....hope.


The only reason I haven't picked up the sniper and gotten to work is because of the hydra effect.  You kill the father (or mother) and the demonic spawn picks up the torch in greater numbers.  There are always 'inheritors' of the corruption.  


We all yearn for the death of Soros, Clintons, Rothchilds, Morgans.......... but my real fear comes in the psychotic ruthlessness of their demonic spawn.  What evils will the next generation concoct?

SumTing Wong's picture

On the Fed chart, is BK a symbol for Uncle Bubble Bath? They need to wind his ass down, because Berkshire is connected to everyone, especially politicians!

zeropain's picture

exactly,  they passed the bill already putting the US tax payer on the hook last year.  and now they want to act like the banks are not TBTF, and that the bill was only a last resort measure we will never need.  Wow,  the balls, on these fuckers.  simply amazing.  

Bastiat's picture

Counter-party derivatives exposure to D-Bank, perhaps?

Buckaroo Banzai's picture

It's instructive to go to the letter and examine all of the redactions. The redactions are overwhelmingly related to liquidity (or lack thereof), especially with regard to the free movement (or lack thereof) of funds between branches.

The other redactions seem to relate to swaps and collateral.

Lack of liquidity, dangerous swaps, and impaired collateral. What could go wrong?

I'm sure a much more knowledgeable person--someone much more familiar with modern banking and JPM's wide-ranging operations-- could look at that document and fill in most of the blanks. It would be interesting to see that analysis.

Glasnost's picture

Lack of liquidity happens IMO.


BUT, not being able to estimate your liquidity at all???

This was my approximate reaction after reading that paragraph...

mkkby's picture

This is all bullshit. 

The big banks have no interest in more liquidity, because they don't earn anything that way.  So more liquitidy = lower earnings, which also weakens their balance sheet.

Also, when you have trillions in assets, nobody is big enough to be your counter party.  So, of course, all the TBTF banks are closely related.  They have to be.

The fed and treasury department can go suck a bag of dicks.  Either you break up the big banks, or you shut the fuck up.  All this talk is just more kabuki for the dumbed down sheeple.

DaveyJones's picture

As we saw last night, if everyone would just listen to CNN and let Hillary and Goldman run the place, all of this would go away. And besides, these issues are so minor compared with sexual orientation. Hillary should know because Bill has tried oriental girls

Kayman's picture


And of course, Bill would know the many ways to orient Oriental girls.

DaveyJones's picture

yes, as he learned in Arkansas, if they're under 18, then you DON'T use a State Patrol car.

Raging Debate's picture

Knuckles - Sure there is just not on CNN. 

The Saint's picture
The Saint (not verified) pods Apr 15, 2016 11:22 AM

If Barney Fife, I mean Bernie Sanders, has one thing right it is to proceed to break up the big banks.  They are a danger to the U.S. economy.

DaveyJones's picture is his "democratic" opponent. The young have so many reasons to be pissed. Not too many young girls taking the Gloria Steinem pill. My guess is having a woman president is #438 on a twenty two year old's priority list. And releasing her speeches is "451" on hers.

Raging Debate's picture

The Saint - I like Sanders and he will get my 'Fuck You' vote. Bill Black is now an economic advisor to him. 

 Kudos to those protestors against lobbying lately. I have a bad knee and back or I wouod have joined them. And I am pleased that Trump at least hammered home the two most important issues of lobbying (bribes) and immigraton. When 50% of the populion doesnt even have $400 it means we are very near 3rd world status.

3rd world doesnt mean no shops, skyscrapers, running water and electriciy these days. We're just not at the point where sons and daughters of big businessmen get kidnapped yet for ransom but we're awfully close. 

 End the Fed already or at the least it should officially be part of governnent, not PRIVATE. This private middle man of Central Banking has captured governments glovally and offers nothing but politicians giant cover for other privage corporate bribe money.

Jefferson was bang on, a country should NEVER give away a critical function of currency to a private corporation like the Fed.

Of course, it was bribes that bought off those politicians 100 years ago. The bribes are just reaching such an epic proportion it is turning the world into a global slum.

 At least some Jews are now starting holding the others that own these banks accountable. If not there will certainly be another holocaust. I have no problem with Jews, Blacks, Yellow etc. My problem is with the Money Changers in the Temple. Such perfected the scam the Babylonians invented. 

gmak's picture

All of your politician are belong to us.  (to get the exact analog to "All of your base are belong to us".

kliguy38's picture

You guys are hysterical bitches....there's nuttin to worry about....they would never let anything happen to us.....they love us

BorisTheBlade's picture

There's nothing to worry about until there is and by that time it's usually already too late.

JPM is plotting its own demise with fantastic arrogance they display.

The Fed will say we said so when it comes to shit really hitting the fan. And so JPM goes the way of dodo.

zeropain's picture

Wow, amazing that Washington DC thinks they can restablize the banks and somehow get rid of TBTF without a crash.  We have a unicorn government? this a huge can of worms and they are going public.  what does that mean?

MillionDollarBonus_'s picture

What do you mean get rid of "Too Big To Fail"? These banks are too big to fail - it's as simple as that. What is the alternative? Just stand by and watch as millions of people see their bank accounts simply evaporate? There would literally be blood in the streets. We have to protect our financial institutions - there is no alternative! Yes, we need to regulate them too, and all salaries should be controlled, not just those on Wall Street - executives earn way too much, I get it. But don't confuse making our economy fair with let ting bank fail. If we let our banks fail, we won't even have an economy!

ersatz007's picture

Most relevant comment of the day.

Yukon Cornholius's picture

What's the differences between central banking and central planning?

MillionDollarBonus_'s picture

Central banking is indeed a form of economic planning, and I see nothing wrong with this. Central planning works, but they key is to make sure it's managed by people who know what they're doing. Many centrally planned economies got this wrong, and they suffered the consequences. Central planning only works if you have the creme de la creme of economic geniuses in charge. Economics is extremely complex, and economic planning is even more complex than that. This is a job for modern day academic superheroes, not your average economist. Every developed economy has a few of these people - the key is to identify these wizards and then give them the tools to manage the economy effectively.