The Fed's Broken Piping In One Chart: JPM "Purchasing Dry Powder" Rises To All Time High $550 Billlion

One of the less followed data series in JPM's quarterly report is the amount of deposits and loans on the bank's balance sheet. The reason for this is because as those who recall the CIO fiasco, the bank's excess deposits over loans is precisely the dry powder the bank uses as collateral to fund risk trades that do not require actual capital allocation but merely an initial (and maintenance) margin. And it was precisely the nearly $423 billion in "excess deposits" as of June 30, 2012, that led the London office of the CIO to put on the massive risk bets in IG9 and various other non-hedging trades, that led to the $6+ billion loss, and to the current series of unprecedented legal claims against the bank. So what is JPM's prop trading capacity as of September 30?

As of the most recent data, which saw JPM's deposit holdings surge by the most ever (except of course for the inorganic "acquisition" of WaMu in Q3 2008) or $78 billion in just one quarter, while loans continued to be flat, we now knows that JPM had marginable power to chase risk higher to the tune of $552 billion, an all time record in excess deposits over loans!

What is more troubling in the chart above is that loans are virtually unchanged for five years now, with the total notional in loans outstanding (blue line) at $729 lower than it was in the quarter when Lehman filed when it hit a record $761 billion and has not been surpassed yet. This, as frequent readers know, is our definition of "all that is broken with the US banking system", because due to QE, whose reserves end up on JPM's balance sheet as deposits, the bank is then incentivized to gamble with this prop trading dry powder instead of lending the money out as loans, whether mortgage, consumer or any other kind: this is money that never enters broad circulation and which will never boost money velocity and thus generate the Fed's much needed inflation (instead merely inflating asset prices to all time highs quarter after quarter). Never, that is, until the Fed finally steps away from QE and banks are forced to reallocate this margined cash into productive investments (when rates rise from 0%), which then and only then, will finally lead to the much delayed inflationary spike.

Paradoxically, as long as QE continues, banks remain resolved to never lend out any money as can be conclusively seen on the chart above. And since there are still those who don't understand the reserve-to-deposits pathway, here - as shown yesterday - is the IMF's Manmohan Singh with the simplest explanation we have encountered to date:

When central banks buy securities, one of the immediate effects is to increase bank deposits, which adds to M2 (in the U.S., practically the Fed has bought from nonbanks, not banks). Whether banks maintain those added deposits as deposits, or convert them into other liabilities (or, by calling in loans, reducing or moderating the growth of their balance sheets), is an open question.

Curiously, despite possessing a record $550 billion in repoed "purchasing power", the CIO unit has been strangely mute in the past few quarters, generating -$232MM in revenue in the past quarter, and losing money for three of the last four, shown on the chart below where the Q2 London Whale loss sticks out like a sore thumb.

So if not trying to corner the IG9 market this time, perhaps Jamie Dimon can elaborate just which marginable and highly leveraged securities he now has on his books courtesy of the $550 billion in freely allocatable collateral courtesy of none other than the Federal Reserve.