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This Is What Happens When A Mega Bank Is Caught Red-Handed
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:
- 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?
- 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?
- 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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Should we really be surprised to see thieves in the Den of Thieves?
Laws are ALWAYS for those who are not "connected."
i think a lot of so called law is written with
one stated purpose but built into the language
is a unstated purpose which is to create unfair
advantage in a market to the affected lobby.
so in effect it is a criminal legal practice.
we should correct this bullshit.
ps. i cannot respond to certain posts for some
reason, apologies if i leave certain topics
of quality and interest hanging. in other cases
i just have no idea what to say anymore!
.
no surprise to find thieves in their den. they
should not be so ubiquitous in the people's
house. (lobbyists, etc.)
from within they are destroying the constitution,
i suspect by blackmail and graft couched in
campaign finance and media coverage. etc...
Careful now, you are saying Dubya might have done something wrong. It's all Obamas fault and you know it. Why do you hate America.
The Black Swan is on the Wing
http://www.youtube.com/watch?v=JqgDzEqdvb0
Central bank soon to become depository of last resort
rehypothecate the alternate accounting methods
and we are all good, (english)? all roads lead to ...
.
http://jessescrossroadscafe.blogspot.com/2012/06/loophoole-that-placed-m...
"..Since the Depression, when thousands of customers were wiped out by failing brokerage firms, the idea that customer assets are protected has been sacrosanct, embodied in laws and regulations that require the assets to be safely segregated. Violating these requirements is a crime.
The rules require a firm to put aside the amount it would owe if its customers’ accounts were liquidated. This would seem simple common sense: if a brokerage firm closed or failed, customers should expect to get the full value of their assets.
But the rules apply only to accounts in the United States. In 1987, the commodity commission approved a series of rules governing foreign futures and options transactions, one of which provided an alternative calculation of how much firms needed to put aside for accounts that traded on foreign exchanges.
The alternative calculation almost always resulted in a lower amount — sometimes much lower — that needed to be segregated in foreign accounts, because it covered only options and futures. Cash and securities held in customer accounts didn’t count. So if a customer held only cash and securities, the firm had no segregation requirement at all..." .....
24 June 2012
High Anxieties: The Mathematics of Chaos
http://jessescrossroadscafe.blogspot.com/2012/06/high-anxieties-mathemat...
.
""The hyper-rich are facing something worse than death: becoming poor. Do you think they will go quietly? I think they will do whatever it takes and sell it to us in the name of 'saving the system.'"
David Malone, Debt Generation
This documentary was started in 2007 by David Malone and Mark Tanner on commission from the BBC. David had finally persuaded the network that a financial collapse was coming, a situation which he had been watching and documenting for some years." ....
"The secret plan is that we're going to keep doing exactly what we've been doing, for as long as we can."
- Daniel Quinn, in, "What a Way To Go"
David Malone posted on the Guardian Financial pages comment threads as GolemXIV - don't know if he still does, this was maybe four years? ago - was one of his "fans" as his writing was always head & shoulders above any other poster - in fact, one of his posts led me to find ZH. . .
he's a thoughtful writer, as are many of his readers/posters - he finally put up his own blog,
http://www.golemxiv.co.uk/
which has some posts people here might find of interest, who knows. . .
VaR is useless given that employees can take outrageous 'hedge' bets. Even if its accurate at that point in time, it could be irrelevant one second later.
Every year, Krugman's growth cycle gets 2% closer to the mantle of the Earth.
More wars bitchezz. Nothing else left.
U.S. Tax Dollars At War
http://www.youtube.com/watch?v=CXzRzaTljXI&feature=player_embedded
http://www.rawstory.com/rs/2012/06/24/al-jazeera-video-breaks-down-milit...
Would someone care to explain why Obama or Romney is a better choice than Ron Paul?
Blair blocked Cabinet from hearing legal advice on Iraq
http://www.independent.co.uk/news/uk/politics/blair-blocked-cabinet-from...
Now if that don't beat all hell. My mother's social security prescription medication money is being used to fund a Fed-backstopped hedge fund.
And, one that is worse than broke at that.
If everyone that is getting terrorized by the FED joins the National Gaurd the revolution should be quite easy.
Long live the revolution.
What's the time horizon on JPM's VaR? I've seen some that are one day so that would affect the 23sig.
LOL, suck all the reserves out of the bank and leave it for the central banks and the tax payers to bail out. Ship the reserves out in private accounts. Why be legit anymore? It's continued financial fraud time.
Slayer Bloodline
http://www.youtube.com/watch?v=YLgkS731l80
Metallica - All Nightmare Long (Official Music Video)
http://www.youtube.com/watch?v=HukRxMuVcvw
italy won against england in an amazing soccer game
The Road... to Serfdom.
Are we there yet?
From the CDE Board at Yahoo Finance:
RBS in Trouble?
Last year, the virulent and malicious Short Side Campaign against Silver coincided with MF Global being assassinated - only word for it - to buy JPM some more time.
This year, according to many - RBS may well be the intended victim.
But maybe instead of cheerfully agreeing to die so JPM can live, RBS will choose to fight back.
Glencore's position in all this is very interesting.
There is clearly an equally virulent Propaganda Campaign - possibly being orchestrated by JPM itself - against Glencore in media all around the world. It has accelerated to an extraordinary extent this past week.
Glencore is not, shall we say, wimpy.
Nor is HSBC, which, according to many leaks, is more and more on the outs with Alpha DOG JPM.
So connect the dots:
Hong Kong buys the LME.
HSBC IS Hong Kong.
Glencore, perhaps, shifting its support away from JPM and towards HSBC???
Do you see why it is not out of the realm of possibility - although it seemed so just a few weeks ago - that Glencore might try to make a friendly or hostile bid for CDE?
It's making more and more sense to me.
And possibly to Glencore itself.
Americans are just to damn fucking lazy to care what is going on. You try to tell them and they roll their eyes in bordom.
It simply will not matter until all those who didn't loose everything already are joined at the hip with the ones sleeping in their cars (if they still have one) or in a community shelter ( if they can afford to keep their doors open).
The elite are electing and defending the elite against the likelyhood that an 'ordinary" American dare try to climb the ladder of success and wealth. The slave song is written, can you hear it being sung?
Taxpayers, on the hook...you kid, right? No New Taxes will ensure that we pay the public bills with public assets to the very people who put us indebt to begin with. They will own your roads, schools, national parks, farms, everything, and your soul too. god bless them, they are doing gods work...but who's god?
totally true.
http://covert.ias3.com/expose/
Time to start your own personal bank run if you haven't already. Quietly and steadily pull out cash. Transact in cash and set some aside, especially for property taxes. It will make profiling your activities more difficult and give you some breathing room. It will also shield you from some credit card/debit card fraud. With ZIRP in place, there is no great reason to leave much cash on deposit with the kleptocrats.
Baa1, Bailout One, Baal One.
http://www.youtube.com/watch?v=xanE62P_FNk
Wonderful and insightful analysis, Tyler; and at the end of it I say "So What?".
Jamie shows up at the Senate Banking Committee, turns around, drops his pants with his Presidential cuff-links showing, and a bunch of Senators kiss his ass for the day before sending him on his way. There is not now nor will there ever be any meaningful regulation of any of these assholes - note Corozine has not been indicted, nor will he ever be - until it truly collapses and all the big banks die. Super ugly scenario.
We've had New Orleans, a market crash, and Fukuskima since 2005. Now banks are taking losses on 23-sigma events. It's enough to make a prepper paranoid.
Something interesting from a few days ago. MS moved more derivatives over to their bank side... if recall BoA did it and people were not happy. There supposedly (from what I had read) a possibility derivatives may need to be paid off by the bank cash.... and... FDIC was not happy then and they don't seem happy now.
"Morgan Stanley Added Derivatives In Bank In First Quarter"
http://www.bloomberg.com/news/2012-06-22/morgan-stanley-added-derivatives-in-bank-in-first-quarter.html
That' the idea. Move bad bets and losses to the bank side for more bailouts. The treasury, Bernanke and the SEC all know of the multitude of fraud by Wall Street. They gave criminal acts and behavior a green light,
The smart banksters cook the books and switch reserves (overseas entities/accounts) with losses. Then come crying to the FDIC for a bailout.
The only intelligent thing I can say is "fuck this shit!"
Is JPM blowing the Fed?
Or is the Fed blowing JPM?
Or is a glorious 69?
It will be interesting to see what some TBTF banks come up with for a marketing pitch when they can no longer rely on the tag line, “hey, at least we’re not as bad as Lehman.”
What is the significance that:
Goldman Sachs has
500% more exposure to risk based capital than the other 3 top big banks (graph 5a)
50% more trading revenue as % of gross revenue (graph 6b)
42,821,356m in derivatives with only 101,927m in assets, while the other banks have
46,361,694m 1,448,262m
51,894,344m 1,312,764m
71,478,760m 1,842,735m (tables 1-12)
I'm sure it's significant, but would love to hear someone that knows/understands more really break it down...