I was perusing ZeroHedge the other day (a fine, rabble rousing rag after my own heart), when I came across a guest post accusing JP Morgan of some funny stuff. Those that follow me know that I really believe JPM to be highly overrated. In reviewing the authors allegations, he may actually be on to something in regards to portions of the AML stuff. In order to truly ascertain the extent, if any, I would have to dig a little further, which I don't have the time to do right now.
I feel he is jumping the gun on the general liquidity argument though. No disrespect intended to the man, for anyone willing to break out a calculator and dispel the "this is the best thing since sliced bread" propaganda and disinformation is cool in my book.
We looked into the concerns raised by the author in the aforelinked article and believe the author has looked at only a few aspects of the cash flow movement and is missing a holistic view. While the concern for shrinking deposit base is quite valid, the apprehension over application of release of cash from purchase and repurchase arrangement is not warranted.
- · The author is primarily looking at the change in the various assets and liabilities balances on an year on year basis to question a substantial decline in cash in hand. However, if we look at the y-o-y change, we observe that the decline in cash occurred in 4Q08 and not in the last quarter. Further, the decline in cash in hand ($33 billion in absolute terms) is resulting from a) a change in the allocation of funds into various asset categories and b) overall deleveraging resulting in reduced total assets.
- · Cash as proportion of total assets has declined from 2.4% as of Sep 2008 to 1.0% in Sep 2009, primarily because of increased investment in securities available for sale (now, the quality of these securities may be a story for another day) as well as increase in Deposits with Banks. Investment securities increased from 6.7% of total assets as of Sep 2008 to 18.3% in Sep 2009, while the deposits with the banks have increased from 1.5% to 2.9%. The investment in securities was also financed by increased liquidity provided by repo and reveres repo transactions. Also, a portion of funds, provided by reduced cash balance and repo and reverse repo transactions, was used to reduce the other borrowed funds on the liabilities side.
- · With regards to concerns about the declining deposits, the Company has also cut back on lending (quite contrary to what they have been alleging to congress) to maintain the loan deposit ratio. The loans as % of deposits has declined from 78.5% as of Sep 2008 to 75.2% in Sep 2009. We did raise our concerns about the shrinking loan portfolio in our preliminary JPM 3Q09 results review (see Reggie Middleton on JP Morgan's Q309 results), which is leading to shrinking of interest earning asset base. This is a significant issue that is, in my opinion, quite under-appreciated.
- · The proportion of funds invested in highly liquid assets (cash, deposits with banks, federal funds sold, securities borrowed) has declined from 21.1% as of Sep 2008 to 18.6% in Sep 2009 might impact its liquidity standing but there is no serious concern yet. Also, from solvency view point, JPM was able to improve y-o-y with JPM’s tangible asset to tangible equity improving from 3.2% as of Sep 2008 to 4.4% in Sep 2009. Of course this solvency standing is only valid when following the current banking regulatory regime, you know, the same one that nearly allowed the banking system to collapse in the first place. If one were to take into consideration the appropriate counterparty concentration capital risk charges, I am confident JP Morgan would be flirting with insolvency. Alas, it appears that it is better to call JPM solvent with rampant risk awash in the system than to brand it more accurately insolvent and account for risks as they should be dealt with.
Now, for fear of anyone believing all is find and dandy with JP Morgan, I have a plethora of issues with it - practically all of which never sang in the popular media nor the sell side banks. See If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan and download
JPM Public Excerpt of Forensic Analysis (free)
For those of you who want to read more on the rampant counterparty concentration risk abound in the system, see:
- The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
- Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
- As the markets climb on top of one big, incestuous pool of concentrated risk...
- Any objective review shows that the big banks are simply too big for the safety of this country
- The ARE trying to kick the bad mortgages down the road, here's proof!
- Why hasn't anybody questioned those rosy stress test results now that the facts have played out?