Earlier today we mocked [8]Jamie Dimon for announcing the cancellation of his firm's stock buyback program, just two shorts months after March 13, when none other than JP Morgan forced the Fed to scramble [9]and release the full stress test ahead of schedule, after Jamie Dimon decided to frontrun the full FRBNY stress test [10] release (whose sole purpose was to determine under what worst case scenario the Fed was ok with allowing JPM and various other Bank Holding Companies to proceed with dividend raises/stock buybacks) and announce just that [9]- a dividend increase and a stock buyback. Well, in addition to some well justified egg in Dimon's face, today's results actually have some far more troubling implications. Because while we now know that the buyback is over, what we still don't know, because Jamie Dimon refuses to tell us, is just how big the CIO P&L loss as of close today. Yes, there are many speculations but nobody knows for sure. Zero Hedge was the first to suggest [11]based on reverse engineering of what the potential loss drivers may well have been, and subsequently the slower media corroborated, that the total loss would be orders of magnitude greater than the $2 billion announced on May 10. But how many orders? Well, for what may be a critical clue, we go to the Fed's stress test itself [10]. Presenting Exhibit A - page 73 of 82:
[12]
This is from the "Comprehensive Capital Analysis and Review 2012 [10]" for JP Morgan, conducted by the NY Fed. Specifically, these are, among others, the permissive gating conditions, which if met, would still enable JP Morgan to proceed with the then announced buyback. The highlighted section above speaks for itself:
- the cumulative "realized losses/gains securities (AFS/HTM) and Trading and Counterparty Losses" amount to $31.5 billion for the pendency of the stress test.
- In other words $31.5 billion is how much pain JPM is allowed, in the NY Fed's view, to suffer before losses and dividends/buyback would jeopardize the capital structure, and the buyback process should be halted
- Once again, as a reminder, the buyback process was halted today [8].
While we do not know the combined loss on these two line items, what we do know as of this morning is that the prohibitive threshold for buybacks was passed just two months after it had been permitted.
Does this imply that the CIO losses, as conferred by JPM to the Fed in private, have a statutory loss potential of over $31.5 billion through Q4 2013? Or is the hit to just this quarter so substantial, that spreading the loss over a period of time has become meaningless, and the Fed has barred JP Morgan from any other future buybacks, i.e., capital outflows, until such time as the trading/realized loss has been offset and the hit to the balance sheet has been undone?
Something tells us that we won't be the only ones asking these questions.
UPDATE: The Independent [13] is noting this morning Europe-time, that the losses at JPMorgan could have grown to $7bn:
Rival traders reckon that the losses could be as high $7bn. "The markets know pretty much what JP Morgan has and in what sizes," said one trader.
The main index on which Mr Iksil's credit default swaps trades were based has calmed down in recent days, which suggests that JP Morgan has decided to trade out of its positions gradually rather than take one massive hit.
...
According to JP Morgan traders, in [Ina Drew's] absence there were regular shouting matches between her subordinates in New York and London. "The strife distracted everyone because no one could push back," one trader told The New York Times.
[ZH: We suspect the apparent 'calmness' is simply a reflection of the moderation in the skew in HY9 and IG9 - but does not reflect the noise that we are seeing in various other credit indices such as HYG, JNK, IG18, and HY18 all of which have traded a long way from 'fair-value' recently as JPM reached for any and every liquid hedge (and at the same time caused the NYFed to postpone the MLIII auction) and also the fact that it is highly unlikely that JPM was actually able to trade out of the now super-illiquid tranche positions that were the cause of these market technicals - leaving basis risk even larger on this hedge of a hedge]
IG9 10Y skew almost normalized...
[14]
as is IG9 5Y
[15]
but this has caused 'problems' in the on-the-run indices...
[16]