Long and the Short of JPMorgan

by rcwhalen
Fri, 05/11/2012 - 06:43

A couple of thoughts on the debacle with JPMorganChase yesterday.  Scheduled on CNBC Squawk Box at 8:00 ET today.  -- Chris

http://video.cnbc.com/gallery/?video=3000089572&play=1

 

1) Not surprised by the size of the loss or source.  You cannot be consistently right when you trade derivatives.  There are times when the relationships you think exist are badly wrong, with disastrous results.  But I wonder how much Dodd-Frank, Volcker Rule contributed to this outcome.  Lot of change underway inside JPM.  

2) The irony here is that the media and investors alike have attributed magical, super human powers to Jamie Dimon and his colleagues.  But JPM is like everyone else, just a partial monopoly.  The interesting thing though is to see them screw up in structured products.  Again, given the risks the bank takes, not at all surprised to see this type of event.  Just shows how volatile and unpredictable is the investment side of the house. 

3) The other point is that these losses by JPM are entirely a function of the way that exotic derivatives for which there is no cash basis (like oil or gold) create risk that would not otherwise exist.  The losses by JPM are, indeed, self inflicted as Dimon said, and entirely speculative.  

Over the past couple of weeks, we have been hearing of a "change of direction" for the CIO group at JPM.  As I noted here, dozens of people have been let go from this area in the past 6 months due to the Volcker Rule.  The media does not get this part of the story for some reason. 

The JPM CIO area had traditionally positioned the book to make money in volatile markets net short to align with the net long book of the CIO in JPM's vast securities portfolio.

Press reports recently have claimed that JPM was shifting the trading book run by "the Whale" in London to a net long position.  If so, then JPM obviously wouldn't be hedging the portfolio anymore, and would actually be increasing the overall risk of the group.  
Not only would this put them at risk for a big loss, but if the Whale's activity wasn't a hedge anymore, and rather "trading" risk -- then it's not clear that this activity would be permitted under Volcker.
Press reports on JPM and the Whale badly underestimate the impact of the Volcker rule on the trading operations of the large banks.  But Jaimie Dimon seems to have handed his head to Chairman Vocker and the advocates of regulation with this error.