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.


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.