This Is How To Kill JPM's CIO Operation

Tyler Durden's picture




 

While JPM may or may not have succeeded in burying its deeply humiliating CIO fiasco at the expense of two things: i) a loss of up to 25% in recurring net income and ii) Jamie Dimon proudly throwing numerous of his key traders under the regulatory bus as scapegoats because it took the firm until July 12 to realize that its entire CDS book was criminally mismarked, thus confirming a "weakness in internal controls" (a statement not only we, but Bloomberg's Jonathan Weil vomits all over), the truth is that one way or another, Jamie Dimon will find a way to reposition his prop trading book somewhere else, even if it means far smaller and less obtrusive profits for the next several years. Yet there is a way to virtually make sure that Jamie Dimon is never allowed to trade as a hedge fund ever again, and in the process risk insolvency and yet another taxpayer bailout. Ironically, it is JPMorgan itself that tells everyone precisely what it is.

As the firm presents in Earnings Presentation statement Appendix, which succinctly summarizes the firm's balance sheet, all the CIO/Treasury group is, is merely an conduit to allocate excess liabilities, which in the case of JPMorgan simply means deposit cash, and use these to generate shareholder returns.

A quick glance at the chart above shows that when it comes to traditional banking aspects, there is a roughly $400 billion mismatch between traditional liabilities (Deposits, which amount to $1,116 billion), and assets (Loans, which are $693 billion). The balance of the balance sheet consists of various shadow bank transformation operations, whereby $982 billion in shadow liabilities (yes, there is a reason why we say that rehypothecated, unregulated, and uninflationary-until-replaced-with-deposits Shadow liabilities are just as important as deposits in the grand scheme of things when it comes to funding matched ROA) fund $965 billion in shadow bank asset operations (including reverse repos, Prime Broker ops, trading assets, LOB cash and other).

As such the (appropriately colored) gray-colored boxes in the asset and liability side can be netted out, and all that remains is the traditional liability-asset mismatch, which also includes a roughly $150 billion excess in equity over goodwill.

The net result is that there is $522 billion in excess assets over traditional reserve-funded liabilities (recall there is $1.55 trillion or so in excess reserves, which disturbingly for the Fed is rapidly declining), that the firm can play around with. And instead of lending these assets out, which is what the Fed and politicians would like, JPM is merely engaging in a shadow transformation here as well, and using deposit cash to put a "delta-hedged" position to overall firm risk, which "somehow" ends up amplifying the firm's risk.

What does all this mumbo-jumbo mean, one may ask?

Simple: if it wasn't for $423 billion in excess deposits over loans, JPM would not engage in any CIO/Treasury like operations.

It also means that instead of waiting for regulators to do the right thing and curb JPM from taking on high risk positions in order to reward shareholders and management using deposit cash, knowing full well that in a worst-case scenario the Fed will have no choice but to once again use taxpayer cash to bail out the firm (that whole "heads I win, tails you lose" saying), it is in everyone's hands to make it so that the firm never again engages in this high-risk behavior.

How?

Pull one's cash deposits with JPM. $423 billion to be exact.

And no more JPMorgan internal hedge fund, and no more risk of spectacular LTCM-like blow up.

Q.E.D.

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Sat, 07/14/2012 - 12:28 | 2615801 GOLDTEETHSILVER...
GOLDTEETHSILVERFILLINGS's picture

Follow the yellow brick road...

Sat, 07/14/2012 - 12:37 | 2615823 SheepRevolution
SheepRevolution's picture

Pity no one killed J.P. Morgan back in his days though..

Sat, 07/14/2012 - 13:07 | 2615914 Not Too Important
Not Too Important's picture

He worked for a certain global bloodline back then. Wouldn't have done any good.

 

Sat, 07/14/2012 - 13:16 | 2615931 Oh regional Indian
Oh regional Indian's picture

His descendents still too NTI. Nothing has really changed. At all.

Same shit, different century...

ori

death-by-a-thousand-slogans

Sat, 07/14/2012 - 14:36 | 2616020 Precious
Precious's picture

Wait a minute.  This is exactly how Bernanke, Paulson and Geithner planned it. 

Hold on.  My table at the Four Seasons is ready ...

Sat, 07/14/2012 - 16:06 | 2616282 smlbizman
smlbizman's picture

ot , but not really....just heard from a friend that works at bac corporate offices in hunt valley md. they just received letters that  their jobs are being terminated by nov....according to the letter some will/may be offered buy outs but she said the atmosphere is more like they are trying to get them to quit......dont know anymore than this right now....but will update ...i will try to get letter if she will give...

Sat, 07/14/2012 - 16:26 | 2616310 El Oregonian
El Oregonian's picture

Too bad the Titanic didn't take enough of those banksters down with her...

Sat, 07/14/2012 - 18:18 | 2616447 old naughty
old naughty's picture

How many bansters among the 1,500+ lost souls? "...You can brush it off calling it collateral damages...

if it wasn't for $423 billion in excess deposits..." points finger also to regular folks, a.k.a. muppets, no?

We are all sharing the responsibilities, for turning a blind eye for so long?

The economic and political (perhaps even social) systems are so rigged, you wonder what can be done about it...

Hummmmmmmmmmmm.

 

Sat, 07/14/2012 - 16:33 | 2616317 Freddie
Freddie's picture

JP Morgan Chase also contains that demonic familiy's other American agent.   Chase as in JP Morgan Chase is the Rockefellers.

Sat, 07/14/2012 - 13:36 | 2615985 disabledvet
disabledvet's picture

The obituary only read "he died peacefully in his sleep" ...off the coast of Dalmatia I believe.

Sat, 07/14/2012 - 14:07 | 2616056 CrockettAlmanac.com
CrockettAlmanac.com's picture

Well then let's see a hundred and one Dalmatians.

Sat, 07/14/2012 - 15:44 | 2616182 AlaricBalth
AlaricBalth's picture

On May 18, 2012 I posted the following:
"Fair value accounting on Level 3 assets is an inexact endeavour which leaves the banks much room for, shall we say, creative price discovery.

At the end of Q1 2012, the Level 3 assets as a % of total assets of the 6 largest bank holding companies were as follows:

JPM  4.7%    BAC  2.1%   C 3.5%   WFC 3.9%   GS  5.0%   MS  3.8%

However, their Level 3 assets as a percent of total assets at fair value were:

JPM  12.0%    BAC  6.3%   C 8.6%   WFC 14.9%   GS  7.2%   MS  9.3%

The higher the percentage of Level 3 assets to total assets implies that there is a greater risk associated with the bank.  With that in mind, GS and JPM have some serious problems lurking..."

In 2010 Konstantin Milbradt of the Sloan School at MIT published the following study called "Booking Profits and Concealing Losses". It does an excellent job of explaining what is occurring in JPM's CIO department. It is technical in some areas but the narrative is quite compelling. I urge you to read it to help understand the "false pricing" of derivatives which all major banks are guilty of.

Here is an excerpt:

"Anecdotal evidence suggests that some assets were actively kept off markets in order to obstruct price discovery and thus avoid adverse balance sheet impact.2 Given the accounting flexibility that comes with the Level 3 category, institutions continue to list these assets on their books at inflated values."

http://www.mit.edu/~milbradt/index_files/level3assets.pdf

Sat, 07/14/2012 - 17:40 | 2616403 disabledvet
disabledvet's picture

Are you saying banking does not even exist in the USA?

Sat, 07/14/2012 - 22:51 | 2616713 illyia
illyia's picture

Alaric Balth - very fine avatar.

http://en.wikipedia.org/wiki/Balti_dynasty

Sun, 07/15/2012 - 00:58 | 2616738 AlaricBalth
AlaricBalth's picture

Thanks. I have delusions of grandeur. :-)

Sun, 07/15/2012 - 01:00 | 2616878 AlaricBalth
AlaricBalth's picture

Double post. My bad.

Sat, 07/14/2012 - 15:29 | 2616223 disabledvet
disabledvet's picture

What if it really was a murder?

Sat, 07/14/2012 - 21:30 | 2616620 Imminent Collapse
Imminent Collapse's picture

Dalmatia? Is that a UB reference?

Sat, 07/14/2012 - 22:52 | 2616718 illyia
illyia's picture

No. That is Dalamatia... but I have often wondered myself...

Sat, 07/14/2012 - 15:40 | 2616242 Silver Bug
Silver Bug's picture

JPM is going to blow itself up eventually. It is just a matter of time.

 

http://silverliberationarmy.blogspot.ca/

Sat, 07/14/2012 - 18:26 | 2616459 RECISION
RECISION's picture

However, seeing how these mongrels never use their own money, but always some-one else's, then they are going to blow up everyone else first aren't they.

By the time they eventually blow up too, well - that doesn't really help us does it.

Sat, 07/14/2012 - 21:13 | 2616608 goldfish1
goldfish1's picture

Life gets wasted waiting.

Sat, 07/14/2012 - 13:05 | 2615904 BanksterSlayer
BanksterSlayer's picture

... while wearing Silver Shoes.

Bill Still's "Secret Of OZ"

http://www.youtube.com/watch?v=swkq2E8mswI

Sat, 07/14/2012 - 17:59 | 2616422 Freewheelin Franklin
Freewheelin Franklin's picture

Neo-Greenbackers? Thanks, but no thanks. Eliminate legal tender laws and let the markets (read:consumers) decide. Lincoln's greenback scheme only worked because of legal tender laws, and a national income tax that was only payable in legal tender.

Sat, 07/14/2012 - 22:49 | 2616093 vast-dom
vast-dom's picture

"Pull one's cash deposits with JPM. $423 billion to be exact." 

Sorry that WILL NOT WORK. Bernank will pump money in and they'll rehypothecate a few of Dimon's personal millions into some shadow perv multiplier right back up to the 400billions and then some. You just can't win until they are shut down.

Sat, 07/14/2012 - 12:28 | 2615802 Muppet of the U...
Muppet of the Universe's picture

B.S.: PNSN

~TacoMFJohnson

Sat, 07/14/2012 - 13:32 | 2615974 jazze
jazze's picture

Can someone please explain to a layman how the shadow banking liabilties are an inflation buffer in the grand scheme of things?

Tyvm

Sat, 07/14/2012 - 13:39 | 2615991 disabledvet
disabledvet's picture

Good question. I would surmise "because the bank would collapse should the losses be realized." but this is only a guess.

Sat, 07/14/2012 - 14:24 | 2616091 RockyRacoon
Sat, 07/14/2012 - 14:41 | 2616135 worbsid
worbsid's picture

DV, that is correct.  Remember the loan insurance (CDS etc) that makes shadow banking possible depends on the insurer being viable for the insurance debt it sold.  This is like me (a poor stiff) selling loan insurance to millions of companies real cheap. Their books show 100% loan coverage.  It is OK until one  loan fails and I don't have the cash to cover the claim. Then the whole thing collapses.  That was the concern for TARP and other bailouts.  If just one fails, the whole house of cards comes down i.e. book value that doesn't exist.    

Sat, 07/14/2012 - 16:46 | 2616330 Freddie
Freddie's picture

It is so sick that this new "capitalism" means these scum companies that are friends of the "state" can lose endless amounts of money by gambling and corruption.  They just get more money from taxpayers by govt theft at the barrel of a gun and badge.

Sick.

Obama is hiring 16,000 IRS agents to make sure you are patriotic and pay your fair share.

Sun, 07/15/2012 - 17:17 | 2618402 roadhazard
roadhazard's picture

"Obama hiring 16,000 IRS agents..."

 

winger humor, lol.

Sat, 07/14/2012 - 17:50 | 2616408 disabledvet
disabledvet's picture

All right fine. "I have no money but I'm on the hook for...185 billion." since the problem is with..."an insurance company"...I as..."the guy with one dollar" is given...ahem.. "185 billion." sounds good...what's the problem?

Sat, 07/14/2012 - 17:51 | 2616413 disabledvet
disabledvet's picture

And you may call me "Uncle Salami" as a consequence!

Sat, 07/14/2012 - 20:56 | 2616591 prodigious_idea
prodigious_idea's picture

Wasn't that the primary rationalization for saving AIG?

Sat, 07/14/2012 - 22:55 | 2616723 illyia
illyia's picture

Yeah.

Sat, 07/14/2012 - 14:28 | 2616102 riley martini
riley martini's picture

 Liabilities money owed would use up the reserves so the money should not enter the real economy; production consuption . Thats my take.

Sat, 07/14/2012 - 17:54 | 2616418 disabledvet
disabledvet's picture

No. You phuck this up...you die.

Sat, 07/14/2012 - 12:34 | 2615813 Tom Green Swedish
Tom Green Swedish's picture

I don't like to keep to much cash in any bank. Just in case I die I won't have to leave anything to anybody.

Sat, 07/14/2012 - 12:36 | 2615819 monopoly
monopoly's picture

Gave up on these broken, corrupt banks with their scum CEOs a long time ago. Would not give these bastards one dollar of my money.

Sat, 07/14/2012 - 12:48 | 2615851 Tom Green Swedish
Tom Green Swedish's picture

You dollar is actually a penny, soon to be a fraction of that. The 800 trillion dollar derivative market is more than you can comprehend.  The bankers will try to equal weight gold with currency but it will fail miserably.  You cannot make gold worth the same abount as all the money in the world.  As it stands the tennis ball court sized rock is worth 10 percent of the worlds assets.  What a Joke!

Sat, 07/14/2012 - 13:21 | 2615947 MeelionDollerBogus
MeelionDollerBogus's picture

Yes, we can and it's been done in the past. The price of gold will rise to match all the outstanding credit & basemoney.

Sat, 07/14/2012 - 13:41 | 2615998 disabledvet
disabledvet's picture

Interest rates..........compound.

Sat, 07/14/2012 - 16:55 | 2616344 El Oregonian
El Oregonian's picture

My Great-grandfather had a 37 section cattle ranch in AZ. Kept his currency in gold and silver in strong boxes. He had several bankers try and convince him to hold his money in their banks which he scoffed and said "My family has always maintained their own accounts and never trusted banks. Well, in 1929 the banks imploded and they came to him asking for loans. He said "I'm a cattleman, which I do damn well. I'm not a banker, and apparently, neither are you".

As a kid, he tell us to never trust others with your money. Invest in what you know about, and never loan to people who talk too much. He died a wealthy man and his family benefits from his financial prowess. He always used to say "If you lose money make sure it is you who lost the money, never let someone else lose your money for you."

Smart man he was.

Sat, 07/14/2012 - 17:00 | 2616350 El Oregonian
El Oregonian's picture

My Great-grandfather had a 37 section cattle ranch in AZ. Kept his currency in gold and silver in strong boxes. He had several bankers try and convince him to hold his money in their banks which he scoffed and said "My family has always maintained their own accounts and never trusted banks. Well, in 1929 the banks imploded and they came to him asking for loans. He said "I'm a cattleman, which I do damn well. I'm not a banker, and apparently, neither are you".

As a kid, he'd tell us to never trust others with your money. Invest in what you know about, and never loan to people who talk too much. He died a wealthy man and his family benefits from his financial prowess. He always used to say "If you lose money make sure it is you who lost the money, never let someone else lose your money for you."

Smart man he was.

Sat, 07/14/2012 - 18:14 | 2616443 disabledvet
disabledvet's picture

Excellent double post. There's a scene in the movie Silverado where "the good guys" go to steal the money stolen from the Pioneers by the highway men. Having concocted a CRAZY scheme to get the money back the Pioneer who is with them demands the money back because he still doesn't trust them...and then is killed. Amazingly the "lock box" is still returned. Is that something your Grandfather would have done?

Sat, 07/14/2012 - 12:39 | 2615829 agent default
agent default's picture

And no Silver/Gold raids. I say go for it.

Sat, 07/14/2012 - 12:43 | 2615840 Waterfallsparkles
Waterfallsparkles's picture

I have been accumulation a good amount of Cash in my checking account at the Bank, waiting to pay all of my Property Taxes.  Paid them all on line today.  Have to get the Cash out of my account.  At least I will not lose my Houses thru Tax Sale if the Bank goes belly up.

Sat, 07/14/2012 - 13:06 | 2615905 Not Too Important
Not Too Important's picture

Until your property tax goes to 45%, which you can't pay, which means the county takes your house - or sells the debt, who then take your house. Coming to CA soon.

Sat, 07/14/2012 - 13:20 | 2615942 ToNYC
ToNYC's picture

Can you say Ghost Town? Try thinking more than one move ahead, please.

Do NOT follow this link or you will be banned from the site!