Jamie Dimon's Quandary: Now That JPM's Internal Hedge Fund Is Gone, Where Will 25% Of Net Income Come From?
Much has been said about JPM's CIO Loss (which so far has come at a little over $5 billion, just as we calculated in the hours after the original May 10 announcement). And with the so called final number out of the way, investors in JPM have breathed a sigh of relief and are stepping back into the company hopeful that a major wildcard about the firm's future has been removed. The issue, however, is that the CIO loss was never the question: after all JPM could easily sell debt or raise equity to plug liquidity shortfalls. The real issue is that just as we explained months before the loss was even known, the Treasury/CIO department was nothing short of the firm's unbridled hedge fund which could do whatever it chooses, and not be held accountable to anyone at least until its counterparties broke a story of an epic loss to the media. And thus the problem becomes apparent: now that every action of the CIO group is scrutinized under a microscope by everyone from management to auditors to regulators to analysts to fringe blogs, the high flying days of whale trades are forever gone. The question then is just how big was the contribution of the Treasury/CIO group, which until today was buried deep within JPM's Corporate and PE Group and not broken out. Luckily, as today's JPM Earnings Presentation (page 14) shows, CIO is now a distinct line item.
(The CIO group is also for the first time broken out as a separate line item in JPM's Financial Supplement, p. 34)
Thanks to the new breakout, reminiscent of Goldman starting to break out its own Prop Trading group some years ago, we now know exactly just how big the contribution to both revenue, but more importantly, net income was courtesy of JPM's Hedge Fund.
The result is nothing short of stunning.
As can be seen on the chart below, the CIO group accounted for whopping 31.5% of Net Income (adjusted to exclude DVA, Reserve additions or releases and one-time items) in 2009, for a just slightly less ridiculous 19.1% of adjusted Net Income in 2010, and 10% in 2011!
Of course, once Bruno Iksil got caught with his back against the wall, the CIO group blew up, and results in a Net Income loss of $2.1 billion in Q2 2012 as was reported today.
And yes, the bloodletting may be over. But something else that is also over, is CIO being a net contributor of up to 30% of Net Income. In fact, going forward, it is safe to assume that since now the Treasury group will return to its standard role of hedging the firm's other positions, it will likely have a negative contribution to net income. After all, if anything, as a result of the CIO debacle Jamie Dimon has at least learned the definition of hedging, which does not mean accounting for a whopping 30% of total net income in any one year!
And this, more than anything is what JPM would be worried about: because is between 20% and 30% of Net Income is gone on a going forward basis, then Jamie Dimon, and JPM shareholders, will have a major problem in the future: CIO generated roughly $4 billion on average per year (2009 and 2010) in the years it was a properly functioning hedge fund. This "profit center" is now gone forever.