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.
It was a fairly decent day for markets yesterday with the S&P 500 and IBEX up +0.25% and +3.42% respectively and Spain’s 10yr yield closing below 6%. That all changed after JPMorgan’s unexpected trading losses hit the wires after the US close. JPM’s share price fell nearly 7% in after hours trading with its 5yr CDS about +20-25bp wider after the headlines. The broader market was affected with the S&P 500 Futures dropping 10pts after the news.
Taking a closer look at the announcement JPM told the market that its Chief Investment Office (CIO) has had significant mark-to-market losses in its synthetic credit portfolio to the tune of $2bn since the end of March. The loss has been partially offset by $1bn of realised securities gains but JPM also flagged that additional losses could be as much as $1bn (or more) and the performance of the portfolio will remain volatile in the quarters to come. Naturally there will be lingering questions around how JPM will manage these positions. Has the firm started to unwind/exit these positions, and if there is more unwinds to come, what does that mean for the broader market? Unfortunately we didn’t get any specifics around the underlying risk positions at the investor briefing overnight. Jamie Dimon said that with hindsight what was meant to be a strategy to hedge the firm’s overall credit exposure was in fact “flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective than economic hedge than we thought”. To put in perspective, the losses (as we know of today) are not unmanageable for a firm that has made on average $4.1bn per quarter since 2009, a total balance sheet size of $2.3trillion and a market cap of $155bn. But questions around internal controls, risk management and strategy will arise and it will also be interesting to see how the rating agencies will react (especially Moody’s given its global review of bank ratings). An event like this also gives regulators more firepower in arguing their case for tighter banking regulations.
All good and correct but, dear Deutsche Bank, we have just two words: Boaz Weinstein.