This Is What Happens When A Mega Bank Is Caught Red-Handed

Tyler Durden's picture

Back on May 10, when JPMorgan announced its massive CIO trading loss (which may or may not have been unwound courtesy of a risk offboarding to another hedge fund which may or may not be backstopped by the Fed as the massive IG9 position was not novated but merely transferred) JPM also disclosed something else which may have bigger implications for the broader, and just downgraded, banking sector. As a reminder, in the 10-Q filing, the bank reported a VaR of $170 million for the three months ending March 31, 2012. This compared to a tiny $88 million for the previous year. According to the company, “the increase in average VaR was primarily driven by an increase in CIO VaR and a decrease in diversification benefit across the Firm.” What JPM really meant is that after being exposed in the media for having a monster derivative-based prop bet on its books, it had no choice, as it was no longer possible to use manipulated and meaningless risk "models" according to which the $2 billion loss, roughly 23 sigma based on the old VaR number, was impossible (ignoring that VaR is an absolutely meaningless and irrelevant statistical contraption). Turns out it is very much possible. Which brings us to the latest quarterly Office of the Comptroller of the Currency report, and particularly the chart on page 7. More than anything it shows what happens when a big bank is caught red-handed lying about its risk exposure. We urge readers to spot the odd one out.

Another way of visualizing the change:

That's correct: the 93% increase in JPMorgan VaR from Q1 2011 to Q1 2012 is solely due to the sudden "realization" that the world's biggest bank by derivative holdings (at just about $73 trillion) is in reality nothing but a glorified hedge fund.

Which brings up three important questions:

  1. Now that the "trading desk" that was responsible for up to 25% of JPM's net income has been effectively closed, how will Jamie Dimon succeed in creating recurring profits in line with historical average and future expectations?
  2. What will happen to the other "VaRs" once they too are exposed, either after the loss is uncovered, or when regulators actually dare to do their job for once and truly dig through the banks' books?
  3. Which other bank has a huge and heretofore undisclosed multi-billion derivative "easter egg" on its books?

For Question 3 we may have a suggestion.

Below we present a chart showing the historical distribution of derivative holdings at Morgan Stanley HoldCo, and Morgan Stanley Bank NA, also per the OCC.

What is notable is that MS is aggressively shifting derivative exposure from its HoldCo to its Deposit unit Morgan Stanley Bank NA. Why? The below summary chart from Thursday's Moody's downgrade of the bank should provide a hint:

What is happening is that Morgan Stanley is moving ever more derivatives from its just Baa1-downgraded (the third lowest investment grade rating) HoldCo to its still A-rated (even if at the lowest A3 rating) depositor entity (yes, Morgan Stanley apparently has deposits, but don't look for ATMs). The simple reason being that MS' counterparties are increasingly reluctant to transact with Morgan Stanley unless they get the implicit backing of some real cash as opposed to just promises by a bank that may be the next in line after JPM to report of a VaR "glitch."

In other words: more and more depositors are being involuntarily placed on the hook to allow the bank to even have the remote chance of generating the same kinds of "hedge fund" type-profits as it did in the past 3 years. Because without its derivative book, MS is just another non-prop trading bank, whose return on equity in a ZIRP environment is at best laughable thanks to a Net Interest Margin which is, well, non-existent.

We just wonder: in light of the recent JPM fiasco, and in light of what is a creeping transfer of trillions in derivatives exposure to an entity where depositors, and eventually taxpayers, would be stuck footing the bill, and more importantly, in light of a 31% drop in Y/Y VaR even as JPM's has nearly doubled after being exposed for being nothing but a glorified Fed-backstopped hedge fund (as we suggested back in April before anyone knew the scope of the JPM derivative-based exposure), shouldn't someone: the Fed, the SEC, the OCC, or anyone for that matter, be finally asking Mr. Gorman just what he has going on in his books?

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jomama's picture

there are only crumbs left in the cookie jar, bitchez.

SilverTree's picture

I've been caught wacking-off a few times. It sucks.

ghengis86's picture

Don't stop, just look them in the eyes and finish like a beast

LetThemEatRand's picture

"I always yell 'I'm not masturbating!' when someone knocks on my office door so they know I'm not masturbating."  Rob Delaney.

Albertarocks's picture

A little off topic but I still think this is funnier than hell...

How to set fire to a cop car: "Easy. You just pour kerosene over a ferret, light it on both ends, put it in." [Alan, The Hangover]

nope-1004's picture

JPig is going down.  The body is too fat for the head - management doesn't have the brain power to handle the huge exposure and structure of that bank body.  They've gobbled up the world without care and attention, soon to have a heart attack and collapse.

When the body gets too big for the brain, even the smartest in the world can't save an out-of-date POS dinosaur.

JPig will be extinct soon.

 

AldousHuxley's picture

Insolvent US banks busy pointing fingers at European banks to deflect attention as they resuscitate themselves with free money from Club Fed.

 

It is like unemployment insurance benefit recipient pointing fingers at welfare recipient. "HAHA! my welfare benefit is better than yours"

 

 

redpill's picture

Let me guess, their net exposure was zero, right?  lol.

 

macholatte's picture

 

 

This Is What Happens When A Mega Bank Is Caught Red-Handed

 

Let's have a look....... I see they get a red mark on a chart and that's it. Jamie still gets paid $100,000/day plus benefits, corp jet, corp credit card, butler, chaufeur, free lunch, free dinner and so on. No human has any personal liability for anyting.

Or did I miss something?

jeff montanye's picture

you are correct sir; no human has any personal liability, just a red mark on a chart.

still history shows that, in prior similar situations, the red marks migrate to locations nearer and dearer, as it were.

jekyll island's picture

"when it becomes serious, you have to lie."

 

    -Juncker

rocker's picture

It has been serious for way too long.  Eh.

Squid-puppets a-go-go's picture

"shouldn't someone: the Fed, the SEC, the OCC, or anyone for that matter, be finally asking Mr. Gorman just what he has going on in his books?"

 "You always were an asshole, Gorman"

Popo's picture

Oh I wish you were right.  But unfortunately, management has this under control:  They'll bonus themselves at obscene levels until the ship finally starts to go under, and then they'll call it a "crisis" and you and I will be forced to bail them out.   There will at no point be any mention of clawbacks, jailtime,  or blame.   And most of the public will go on believing that the collapse was an act of god.

We've all seen this movie 100 times before.   It's not some sideshow to the business of banking -- it *is* the business of banking.

 

Mad Mad Woman's picture

I think the people will not allow any more bailouts. People will start blowing them up. I am not going to condone any more bailouts. I will revolt!

rocker's picture

You really believe the people are in charge.   Please......... 

Sudden Debt's picture

They're all going down.
Look at the size of ms! Bigger than gs and c, who would have known!

AnAnonymouses's picture

US citizenism banks fat just like US citizenses!  Whole world looking forward to fat American citizenism heart attack!  China like to eat corpse!  US citizenism babies make great longevity powder!

Ms. Erable's picture

Almost junked you, then did a double-take on the user name. Nice. :)

Tom Servo's picture

Avatar is win, and i about skipped past your post as well since he doesn't make much sense...

 

ParaZite's picture

JP Morgan going down you say? 

4 words. Too Big to Fail. 

The elite didn't allow them to fail before. I doubt they will allow them to fail now. 

Debt-Is-Not-Money's picture

The different parts of the body were having an argument to see which was most important and who should be in charge.

The brain said, "I do all the thinking so I'm the most important and I should be in charge."

The eyes said, "I see everything and let the rest of you know where we are, so I'm the most important and I should be in charge."

The hands said, "Without me we wouldn't be able to pick anything up or move anything. So I'm the most important and I should be in charge."

The stomach said, "I turn the food we eat into energy for the rest of you. Without me, we'd starve. So I'm the most important and I should be in charge."

The legs said, "Without me we wouldn't be able to move anywhere. So I'm the most important and I should be in charge."

Then the asshole said, "I think I'm the most important and I should be in charge."

All the rest of the parts said, "YOU?!? You don't do anything! You're not important! You can't be in charge."

So the asshole closed up.

After a few days, the legs were all wobbly, the stomach was all queasy, the hands were all shaky, the eyes were all watery, and the brain was all cloudy.

They all agreed that they couldn't take any more of this and agreed to put the asshole in charge.

And the moral of the story is?

You don't have to be the most important to be in charge, just an asshole.

Read more: Which part of your body is most important part? | Answerbag http://www.answerbag.com/q_view/353520#ixzz1ylihBtmV
analyzer_66's picture

mhm, reminds me of the story of the bank that taught its asshole to speak, pretty soon it started shouting and demanding equal rights, and the bank would punch itself in the asshole and stuff things in it to make it shut up, pretty soon the eyes glazed over and the mouth closed up and the brain died

vast-dom's picture

there's no more banking! it's pure ponzi all the way till armageddon! fed are crooks along with laughable sec et. al gaming the planet with reckless abandon masked as thoughtful concern.

trust that you will be fucked over and invest, or not, accordingly. there is little justice left. all that's left is the nature of cycles, physics and collapsed lung breathes a doubt in everyone.....

 

SHORT THE PLANET (as a matter of principle)!

DoChenRollingBearing's picture

And the easiest way to do that?  Buy gold!

Bananamerican's picture

"more and more depositors are being involuntarily placed on the hook"

Good.

4 years on, if you still have money in a TBTF, you got it coming....

buckethead's picture

The vast majority of Americans are blithely unaware of the monetary system we are subjected to. I am among them. I don't know what made me start seeking information other than being proven wrong in internet debates.

 

Too much time on my hands having been a builder of housing.

 

I can't revel in the fact that so many are going to get burned. People actually believe they are doing the "right" thing by playing by the (farcical) rules. 

 

not every one will have the time or inclination to discover truths of banking. We too often take things at face value, but that makes us naive, but not deserving of being robbed.

vast-dom's picture

don't be naive keep paying your taxes and don't ask questions lest anyone disturbe the Fed and the gov from distributing monies for Wall St bonuses and fake ponzi market subsidies. GDP? Productivity? Flow of capital to generate real growth? Fundamentals? No that's not in the interest of the gov or the fed....don't be naive.....just watch Bernank feign thoughtful concern, listen to the nobel peace prize winner as his drones break inter nation conventions at a direct cost to you, read the laureate OPINION peaces of aliens stimulating the economy.......and the sheeple cheer of their respective binary-candidates. it's worse than a farce!

 

(PS a banker gets paid and gets bonuses by taxpayer funded bailouts and ZIRP and QE, then did that banker pay taxes?)

Cathartes Aura's picture

naive works until it doesn't, then you've got to catch up on informed - as you did - never too late to read ZH!

is this your song?   

Meat Puppets - Buckethead

http://www.youtube.com/watch?v=t62pezFHiJ4

Not Too Important's picture

Somewhere I read, it may have been ZH the other day, I'm too tired to look, about how the bulk of JPM's 'profit' is nothing more than a giant government subsidy, that they aren't really too profitable at all.

If JPM get this 'government subsidy', then you can bet the other four all do, too.

I tried to find it later that day and couldn't, but I sure think someone should do a full story on it. Just a simple comparison between what each Big 5 bank makes as a subsidy, and what their P/L looks like without the subsidy. That would very simply show whether they really make any money or not.

It may be possible that the big five only exist because of a permanent subsidy, and not any banking/investment profits. I know this has been discussed before, but not with specific charts breaking this out.

Farmers paid not to grow, bankers paid only to give themselves bonuses. No wonder Congress buys a lot of farmland and Big 5 bank stock for themselves.

 

Mad Mad Woman's picture

I think there are a lot of people that know that these banks are really insolvent. If you take into account the derivative trade at each bank, they ae insolvent. These banks don't have that kind of cash. The jig is soon up. They will die. They MUST die. We cannot bail out any banks period. They MUST die.

BotMightFly's picture

"We cannot bail out any banks period." Uh, we did not bail them (the banks, etc.) out.  The banks, the fed, the congress bailed out the banks........We........had nothing to do with it.  

A boycott, commodities buy, moving money out of checking  or at least downsizing it, a real estate tax moritorium.....then, they may take notice - if you are not chipped out of existence.

DoChenRollingBearing's picture

JP Morgan took a big hit in the "100 Most Respected Companies" in Barron's this weekend.  So did other TBTF banks.  And who is Number One?  Apple, again.

Read about this and "guar gum" and lithium all at my new blog piece "Review of Barron's -- Dated 25 June".  Hey, some of you may not want to spend the $5.00!

http://tinyurl.com/6mxsx5y

old naughty's picture

the "exposures" just never end...

GeneMarchbanks's picture

'ignoring that VaR is an absolutely meaningless and irrelevant statistical contraption'

http://www.amazon.com/The-Misbehavior-Markets-Financial-Turbulence/dp/04...

That's correct: the 93% increase in JPMorgan VaR from Q1 2011 to Q1 2012 is solely due to the sudden "realization" that the world's biggest bank by derivative holdings (at just abnout $73 trillion) is in reality nothing but a glorified hedge fund.

According to Taleb taking 10 to 15 times the risk of a 'regular' hedge fund.

dannyboy's picture

The real mafia pays far better ;).

Centurion9.41's picture

Great work, Mandlebrot should be required reading for all undergraduate students.

trebuchet's picture

Great Article! 

 

The punchline is LOST because of the writing style... Look at the paragraph below, which is  one long sentence with two colons, many "and this, "and that", "and  xxx "

It only takes two minutes to break it into sentences.  Or try using bullet points..  PLEASE!

 

I'm not being a grammar nazi, just asking for a little more clarity coz Im a muppet and dont think at the speed you guys write. 

 

 

 

 

We just wonder: in light of the recent JPM fiasco, and in light of what is a creeping transfer of trillions in derivatives exposure to an entity where depositors, and eventually taxpayers, would be stuck footing the bill, and more importantly, in light of a 31% drop in Y/Y VaR even as JPM's has nearly doubled after being exposed for being nothing but a glorified Fed-backstopped hedge fund (as we suggested back in April before anyone knew the scope of the JPM derivative-based exposure), shouldn't someone: the Fed, the SEC, the OCC, or anyone for that matter, be finally asking Mr. Gorman just what he has going on in his books?

No Euros please we're British's picture

Hey, trebuchet, I bet you're the guy that reported Egan-Jones to the SEC!

Nobody For President's picture

I know exactly what you are saying, used to be there. Just work at and you #will# get up to speed.

As the old saying goes: "Keep up or get drug."

resurger's picture

JPM Backtesting the VaR actually showes bigger losses ...

Gene, you know the moon walk, i thought so lol

 

Beam Me Up Scotty's picture

If there is another "Lehman" event, I hope its JPMorgan thats the one.  Then in the future, we can be on the lookout for the next "JPMorgan" event

Albertarocks's picture

I'd love to see those evil skunks crash and burn as well but in reality, with the single biggest derivatives risk exposure of any bank in the entire world (100 freakin' trillion $ worth), if JPM has a Lehman event we can 'literally' expect lights out.  Check out this outstanding graphic showing how much risk they have put themselves and therefore the entire world to.  Prepare to have your mind blown:

http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html