When A JPM "Hedge" Is Anything But A Hedge - In JPM's Own Words

While JPMorgan's arrogance and complete ignorance (intentional or not) of both risk limits and regulatory expectations is now grossly obvious, the fact remains that a lie is a lie and given the following, how can anyone ever trust anything that anyone from this 'fortress-like' balance sheet ever says again? To wit, again and again and again, the public and the regulators were told this was a long-term 'hedge' for a bank that is a natural net 'lender' and therefore exposed to deterioration in credit markets over the long-term. However, as JPMorgan's own data and words show, the SCP 'hedge' in fact lost money in all spread-widening scenarios - exactly when it should be making money to cover 'offsetting' losses in the bank's lending book. In fact, it appears, that this was simply another low 'risk-weighted' way to get around regulatory capital rules and be 'long' the market - in the first three months of 2012, the CIO tripled the size of the SCP book, taking it from $51 billion to $157 billion, in a buying spree that was not motivated by decision-making on a “very long-term basis.”


"It's A Hedge"...

On May 10, Mr. Dimon continued to mis-characterize the SCP as a “hedge."

 

Mr. Braunstein told the Subcommittee that the SCP book could both be long and provide a “fat tail hedge.”

 

during the interview with Mr. Dimon, JPMorgan Chase’s General Counsel denied that Mr. Braunstein had characterized the SCP book as a hedge during the April earnings call

"A Hedge For What?"...

Mr. Braunstein explained to the Subcommittee that JPMorgan Chase, by its very nature as a bank which loans money, was “long” credit, because when credit deteriorated, the bank lost money.

"Scenario Analysis Showed SCP Was Not a Hedge"...

ZH - while it appears the risk and trading groups 'believed' the SCP to be a highly convex tail-risk-hedge, it wasn't

 

The statements by Mr. Braunstein and Mr. Dimon were also contradicted by an internal bank analysis that both received two days before the earnings call. That analysis clearly depicted the SCP as in a long posture and likely to lose money in a negative credit environment – which meant it was not operating as a hedge to offset the bank’s other credit risks.

 

On April 11, 2012, an internal CIO presentation prepared for senior management including Messrs. Dimon and Braunstein, reinforced Ms. Drew’s April 5 characterization of the book as long. The presentation was prepared by the CIO traders with input from the head of JPMorgan Chase’s Model Risk and Development Group, as well as his deputy, who had previously been a credit trader in the Investment Bank.

 

On page 3 of that presentation, entitled “Synthetic Credit Summary: Risk & P&L Scenarios,” reprinted below, a table showed that in multiple credit spread widening environments – i.e., situations in which credit deteriorated and the risk of default increased – the SCP would lose money.





Table via Page 284/307 in the report here

 

ZH - What you see here is a report that states that when credit spreads widen (or credit conditions deteriorate) the SCP 'hedge' - instead of increasing in value and providing hedge 'profit' for the underlying bank's loan book losses - actually loses money! It is a net long credit position...

"And Was Getting Longer Credit (less and less a tail-risk hedge)..."

Overall, in the first three months of 2012, the CIO tripled the size of the SCP book, taking it from $51 billion to $157 billion, in a buying spree that was not motivated by decision-making on a “very long-term basis.” When asked about these types of trades, JPMorgan Chase conceded to the Subcommittee that the SCP book was “actively” traded

"But It Must Be A Hedge Or JPMorgan Was Breaking The Volcker Rule's proposals..."

Among other criticisms, JPMorgan Chase’s comment letter expressed concern that the Volcker Rule’s proposed regulation might not permit the CIO to continue to manage the Synthetic Credit Portfolio. The comment letter stated: “Under the proposed rule, this activity [i.e., credit derivatives] could have been deemed prohibited proprietary trading.”

 

In addition, when Ina Drew provided briefing materials to Mr. Braunstein the day before the earnings call, she provided no support for the notion that the synthetic credit trades would be permitted under the Volcker Rule.

 

She sent him a “Questions and Answers” document, and with respect to the Volcker rule, wrote: This analysis directly contradicts Mr. Braunstein’s statement during the earnings call that the bank had concluded that the SCP would be found to be “consistent with” the Volcker Rule.

Or did JPMorgan's executives simply follow the new normal ethical stance preached by J-C Juncker - "When it becomes serious, you have to lie."