Jamie Dimon

"One of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling. He points out that “Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands." - James Montier, May 6

As reported yesterday, here it is officially:

• JPMORGAN SAYS INA DREW TO RETIRE; MATT ZAMES NAMED NEW CIO
• JPMORGAN SAYS DANIEL TO STAY CEO OF EUROPE/MIDEAST/AFRICA
• JPMORGAN SAYS CAVANAGH TO LEAD TEAM OVERSEEING RESPONSE TO LOSS
• JPMORGAN CHASE SAYS ZAMES NAMED NEW CIO

Good bye Ina: we are sure that you will voluntarily claw back your $15 million bonus from 2011 one day ahead of the JPM shareholder meeting. 

Now... Matt Zames... Matt Zames... where have we heard that name before... OH YES: he just happens to be the Chairman of the Treasury Borrowing Advisory Committee, aka the TBAC, aka the Superommittee that Really Runs America. The Matt Zames who... "previously worked at hedge fund Long-Term Capital Management LP, may have benefited as the collapse of Lehman Brothers Holdings Inc. and JPMorgan’s takeover of Bear Stearns Cos. left companies and hedge funds with fewer trading partners in the private derivatives markets." In other words, the US Treasury is telegraphing it is now firmly behind JPM.

As first pointed out here last week, IG9 10Y credit risk has pushed nothing but wider since the JPM news broke. Between the size, common-knowledge, and technical richness of the position, liquidity is providing its helping hand as the legacy credit index is now 25bps worse than last week's lows (and 17bps worse than when JPM announced) - while the on-the-run IG18 is only 10bps wider over this period. Extrapolating the $200mm DV01 we assumed from the initial announced loss and spread movement, this is potentially an additional $3.4bn loss for JPM already (who we can only assume have been trying to unwind). Until the skew (the spread between the index and its components) narrows further - which it is today (though momentum will take over at some point in the index itself) - it is likely that the runaway train will keep going and going, until JPM issues a formal announcement that the firm is fully out of the trade, together with a final tally of its losses, which will probably be double the reported loss as of Thursday. Here is the good news: we are 100.4% certain JPM was the ONLY prop trading bank to be massively, massively short IG9-18 into this epic blow out. Because if other had suffered billion dollar losses, they would all pull a Jamie Dimon and fess up. Right?

• Default now or default later? (FT)
• Monti warns of tears in Italy's social fabric (Reuters)
• Fear Grows of Greece Leaving Euro (FT)
• Greek Elections Loom as Key Bailout Opponent Defies Unity (Bloomberg)
• Santander, BBVA to Set Aside 4.5 Billion Euros for New Cleanup (BBG) - Thank god they both passed the stress test
• Austerity Blow for Merkel in German State Election (Reuters)
• Apple Founder Wozniak to Buy Facebook Regardless of Price (Bloomberg) - so... another ponzi.
• Dimon Fortress Breached as Push From Hedging to Betting Blows Up (Bloomberg)
• Saudi and Bahrain Expected to Seek Union: Minister (Reuters)
• Obama Pitches Equal Pay to Win Women Even as Charges Drop (BBG)

All you need to read and some more.

On Thursday night, after it became clear that JPM has lost at least $2 billion on what is most likely an IG9 Index skew (Index less Intrinsics) trade gone horribly wrong, we first predicted (and promptly were piggybacked on by other various financial blogs) that based on various factors, there is about $3 billion more in the pain trade coming in JPM's general direction, once IG9 blows out to catch up to a fair value not supported by JPM(artingale's) infinitely backstopped prop desk. Sure enough, by closing on Friday, IG9 (and the entire IG curve), had blown out wider, by a whopping 10 basis points: one of the biggest intraday moves in nearly a year. In P&L terms, by close of Friday, all else equal, JPM had lost another $2-3 billion on the same trade it had lost over $2 billion since the beginning of April. We expect to hear confirmation of this shortly. Which however brings another question: has JPM closed out its losing trade, or is the entire move in the index (and to a far less extent in the intrinsics) due to hedge funds who have piggybacked on the "crush JPM" trade? The truth is we don't know, and until we get the latest weekly DTCC data on CDS notional outstanding we won't know. However, our gut feeling is that it would have been virtually impossible for JPM to lift every single offer in unwinding a $100+ billion notional position without sending the entire IG curve multiples wider. Which is why keep a close eye on the IG9 10 Year skew - this is where, as ZH first noted, the action is. If the skew soars, it is likely that the runaway train will keep going and going, until JPM issues a formal announcement that the firm is fully out of the trade, together with a final tally of its losses, which will probably be double the reported loss as of Thursday. At which point IG9/18 will see an epic ripfest as those short risk will scramble to cover.

Anyone who worked in finance in the decade before Glass-Steagall was repealed knows that prior to Gramm-Leach-Bliley the megabanks just took their hyper-leveraged activities offshore (primarily to London where no such regulations existed). The big problem (at least in my mind) with Glass-Steagall is that it didn’t prevent the financial-industrial complex from gaining the power to loophole and lobby Glass-Steagall out of existence, and incorporate a new regime of hyper-leverage, convoluted shadow banking intermediation, and a multi-quadrillion-dollar derivatives web (and more importantly a taxpayer-funded safety net for when it all goes wrong: heads I win, tails you lose). I fear that the only answer to the dastardly combination of hyper-risk and huge bailouts is to let the junkies eat dirt the next time the system comes crashing down. You can’t keep bailing out hyper-fragile systems and expect them to just fix themselves. The answer to stupidity is not the moral hazard of bailouts, it is the educational lesson of failure. You screw up, you take more care next time. If you’re bailed out, you just don’t care. Corzine affirms it; Iksil affrims it; Adoboli affirms it. And there will be more names. Which chump is next?

In a development that would make Dostoevsky turn in his grave, we learn that the first three casualites of Fail-Whalegate have been identified.

Today's Meet The Press PR damage control campaign orchestrated on behalf of Jamie Dimon by the fawning press was just another attempt at redirection, in which a faux contrite Jamie Dimon promises that as a result of being '100% wrong' about his prior "Tempest in a Teapot" description of the Bruno Iksil debacle, he has learned his lesson, and in tried and true American fashion deserves a second chance. The rest was filler. What was not said is that the entire business model of the modern US banking edifice, where due to the Net Interest Margin limitations imposed by ZIRP, is one of prop trading as being a glorified hedge fund is the only way the banks can generate a rate of return above their cost of capital. What was also not said was the glaring lies by Blythe Masters from a month ago who swore up and down to CNBC that JPM does not engage in prop trading. What was also not said is that contrary to "conventional wisdom" where a few prop traders have been sacked (most likely due to not taking enough risk) prop trading is alive and well across Wall Street, even if it has been largely rebranded as 'flow trading' - just as the high freaks are scrambling to come up with a new name for HFT because that will make all the difference. What was also not said, nor discussed, is why anyone would trust or invest in these money center banks when their balance sheets are so opaque, even their CEOs flip flop within a month of what is really happening, with accounting standards so poor, that nobody can figure out what they are investing in, and why Mark-to-Market is still halted (Aren't banks finally quote unquote healthy?). Finally, the most important thing not said, was Glass-Steagall, the one law whose overturning allowed the commingling of deposits and hedge fund activity courtesy of Gramm-Leach-Bliley, hilarious called the Financial Services Modernization Act of 1999. If America is to have even a remote hope of returning to normalcy, Glass-Steagall has to be reinstated. Which is why nobody brought it up on MTP: neither the anchor who is accountable to an organization which needs the status quo for advertising revenues, nor the hungry for TV exposure senator, nor the DCF-expert access journalist. Nobody.

Someone has to take the other side of the JPM debate. I'll try.

As Nassim Taleb described in The Black Swan these kinds of trades — betting large amounts for small frequent profits — is extremely fragile because eventually (and probably sooner in the real world than in a model) losses will happen (and of course if you are betting big, losses will be big). If you are running your business on the basis of leverage, this is especially dangerous, because facing a margin call or a downgrade you may be left in a fire sale to raise collateral. This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which I think is probably what makes these kinds of practices so attractive to the arbitrageurs of Wall Street (and of course Wall Street often selects for this by recruiting and promoting the most wild-eyed and risk-hungry). Martingale works by betting, and then doubling your bet until you win. This — in theory, and given enough capital — delivers a profit of your initial stake every time. Historically, the problem has been that bettors run out of capital eventually, simply because they don’t have an infinite stock (of course, thanks to Ben Bernanke, that is no longer a problem). The key feature of this system— and the attribute which many institutions have copied — is that it delivers frequent small-to-moderate profits, and occasional huge losses (when the bettor runs out of money).

Either Dimon misled the public about the gravity of the festering trades during his company’s first-quarter earnings call last month. Or he didn’t know what was happening inside the bowels of his own company. History tells us the latter is the norm for Wall Street bosses, though it’s hard to say which is worse.

We have presented our opinion on the JPM prop trading desk repeatedly, in fact starting about a month ago. Last night, Senator Carl "Shitty Deal" Levin also decided to join the fray, which is to be expected: the man needs air time. And now, in a surprising twist, competing banks, all of whom have more than enough skeletons in their own prop desk trading closet, are starting to speak up against the bank that should not be named. Enter Deutsche Bank's Jim Reid and his take on the Fail Whale.

Having listened to the conference call (I was roaring with laughter), Jamie Dimon sounded very defensive especially about one detail: that the CIO’s activities were solely in risk management, and that its bets were designed to hedge risk. Now, we all know very well that banks have been capable of turning “risk management” into a hugely risky business — that was the whole problem with the mid-00s securitisation bubble, which made a sport out of packaging up bad debt and spreading it around balance sheets via shadow banking intermediation, thus turning a small localised risk (of mortgage default) into a huge systemic risk (of a default cascade). But wait a minute? If you’re hedging risk then the bets you make will be cancelled against your existing balance sheet. In other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. That is how hedging risk works. If the loss on your hedges is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging risk. You are speculating.

Jamie Dimon seems to have handed his head to Chairman Vocker and the advocates of regulation with this error.