JPM Crashing After It Convenes Emergency Call To Advise Of "Significant Mark-To-Market" Losses In Bruno Iksil/CIO Group

Tyler Durden's picture

Out of nowehere, JPM announced 40 minutes ago that it would hold an unscheduled 5pm call to coincide with the release of its 10-Q. Rumors were swirling as to why. The reason is as follows:

  • JPMORGAN SAYS CIO UNIT HAS SIGNIFICANT MARK-TO-MARKET LOSSES - "Fortress balance sheet" at least until Bruno Iskil gets done with it.
  • JPMORGAN SAYS LOSSES ARE IN SYNTHETIC CREDIT PORTFOLIO - but, but, net is NEVER, EVER Gross.
  • JPM WOULD NEED $971M ADDED COLLATERAL IF RATINGS CUT ONE-NOTCH
  • JPM WOULD NEED $1.7B ADDED COLLATERAL IF RATINGS CUT 2 NOTCHES - how about three notches?
  • JPMORGAN: MAY HOLD SOME SYNTHETIC CREDIT POSITIONS LONG TERM - "Level 3 CDS FTW"
  • "As of March 31, 2012, the value of CIO's total AFS securities portfolio exceeded its cost by approximately $8 billion"

As a reminder, the CIO unit is where Bruno Iksil was making $200 billion-sized bets. Basically JPM has suffered massive losses at its CIO group most likely due to its IG/HY positions held by Iksil.

In Corporate, within the Corporate/Private Equity segment, net income (excluding Private Equity results and litigation expense) for the second quarter is currently estimated to be a loss of approximately $800 million. (Prior guidance for Corporate quarterly net income (excluding Private Equity results, litigation expense and nonrecurring significant items) was approximately $200 million.) Actual second quarter results could be substantially different from the current estimate and will depend on market levels and portfolio actions related to investments held by the Chief Investment Office (CIO), as well as other activities in Corporate during the remainder of the quarter.

 

Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO's synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO's AFS securities portfolio. As of March 31, 2012, the value of CIO's total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.

 

The Firm is currently repositioning CIO's synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm's overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.

 

Accordingly, net income in Corporate likely will be more volatile in future periods than it has been in the past.

 

The Firm faces a variety of exposures resulting from repurchase demands and litigation arising out of its various roles as issuer and/or underwriter of mortgage-backed securities (“MBS”) offerings in private-label securitizations. It is possible that these matters will take a number of years to resolve and their ultimate resolution is currently uncertain. Reserves for such matters may need to be increased in the future; however, with the additional litigation reserves taken in the first quarter of 2012, absent any materially adverse developments that could change management’s current views, JPMorgan Chase does not currently anticipate further material additions to its litigation reserves for mortgage-backed securities-related matters over the remainder of the year.

All of this is coming form the just filed 10-Q. The full link is here. 

Call dial in: (866) 541-2724 in the U.S. and Canada; (706) 634-7246 for international.

Stock now down 5% after hours dragging down ES 7 points with it.

Some segments from the 10-Q as we peruse it:

  • A one-notch downgrade in the Firm’s internal risk ratings for its entire wholesale loan portfolio could imply an increase in the Firm’s modeled loss estimates of approximately $2.0 billion.

 

and just for some clarity on how this occurred. We know the poisitions that Iksil held were in IG9 (more likely to be tranches) but this $2bn loss comes from a tiny 12bps decompression in the index - which means the DV01 must be huge...(as we already knew given the massive rise in net notional that we warned about)...

 

This is the Investment Grade credit index series 9 - which is the most active tranche-related index and was the index that Iksil had driven massively rich to its fair-value...

Chart: Bloomberg