In the aftermath of the JPM CIO prop trading blunder, the firm disclosed that the capital used for risky bets such as attempting to corner the IG or HY markets was the result of excess deposits over loans, which at that time stood [4]at $423 billion, resulting in $323 billion in CIO invested and non Marked-to-Market "Available for Sale" securities. Following yesterday's CFO update on the state of the mortgage market, which we recapped here [5], and which warned how the recent spike in rates would impact the firm's balance sheet, the firm also provided an updated snapshot of its balance sheet as of June 30, broken down by core capital components. We now know that in the one year period since the London Whale blunder, the firm's available "dry powder" which can be invested in any type of AFS security, or in stocks, or bonds, or any other risk asset for that matter, has now risen to a record $497 billion, the result of a record $1203 billion in deposits offset by just $706 billion in loans, or what we assume is a record low 60% loan-to-deposit ratio.
[6]
Further, recall that the surge in deposit on bank balance sheets is purely a function of QE, which leads to a rise in deposit books however without a matching increase in loans, as the Fed is now the core-provider of the "credit growth" in the economy, which also means that once tapering take place, and/or QE is stopped outright, bank prop trading capital will at worst see its unprecedented daily increase grind to a halt (or worse, drop, if and when a bank decides to start selling).
So what securities is JPM investing this half a trillion in excess cash in? Alas, we don't know. We hope to find out following the next JPM "prop trading" fiasco. With mortgage, and general loan, origination collapsing as a result of the drop in loan demand, it is virtually inevitable that the answer should come soon enough.