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Bloomberg Bombshells re: JP Morgan $2B Loss

Posted by Larry Doyle on May 14, 2012 7:54 AM |

Bloomberg just reported a couple of bombshells which, when digested, strike right at the integrity and veracity of JP Morgan CEO Jamie Dimon’s comments a month ago.

What did Bloomberg report?

The JPM traders managing the risk within this portfolio were known to execute trades over the course of the last few days of the month. Why is that so interesting and important?

If the firm had such large and unwieldy positions, this end of month trading activity would likely be seen as an indication that JP Morgan was trying to influence the month end pricing valuations of the indices in question. Those pricing valuations would obviously directly correlate with reported profits and losses. 

In layman’s terms, active and aggressive end of month trading for the purpose of influencing a month end valuation is known as “banging the close.” I addressed this type of trading in August 2010 when I wrote, “Markets Don’t Go Up, They’re Put Up”:

…the simple fact is variations of ‘banging the close’ or assorted other techniques can be used to illegally move many markets. Although I never put much credence in those who promoted conspiracy theories and tales of market manipulation, I now do not discount those who hold these feelings —  including my uncle, a world class cynic and longstanding broker. What did he share with me a few months back? He offered, “Larry, it’s a racket. Markets don’t go up, they’re put up.” I chuckled. . . and he responded, . . . ”You think I’m kiddin’ ya?”

How could this month end activity have been detected?

If JP Morgan’s derivatives trades had to be reported via TRACE (trade reporting and compliance engine), the regulators who are supposed to oversee JP Morgan’s activity could have witnessed and regulated the risk within JP Morgan’s investment portfolio MUCH earlier. I posed this very challenge in mid-2009 in writing, Can We TRACE JP Morgan’s Business?

What other battles are being waged by Wall Street firms looking to defend their turf at the expense of consumers and investors? Credit cards and credit derivatives. Which Wall Street firm has the greatest combined exposure to these businesses? None other than JP Morgan Chase.

In regard to derivatives activity, JP Morgan has a dominant position in the market. Why? Their strong capital position, enormous balance sheet, and strong credit rating make them an attractive counterparty for customers. Make no mistake, JP Morgan has a license to ‘print’ money, and a lot of it, across the entire derivatives platform.

What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine.

Bloomberg launched a second and larger bombshell this morning, as well. Erik Schatzker referenced the fact that Dan Pinto, JP Morgan’s European head of investment banking, had taken over the management of the risk within this portfolio in March of this year. Yes, March. That is, a month before Dimon said this situation was little more than a tempest in a teapot.

If, in fact, JP Morgan was engaged in a version of ‘banging the close’ and the CIO’s office had ceded control and oversight of these positions, then what does this say about Mr. Dimon? In my opinion, if these allegations as reported by Bloomberg are accurate, then Dimon has lost ENORMOUS credibility in the marketplace. One may go so far as to ask the question of Mr. Dimon that has been asked of many a Wall Street CEO.

What question is that?

How do you know when Jamie Dimon is lying?

When his lips move.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred


    A loud shout out to you for being out front on these issues. Main stream media outlets are finally coming around to consider these issues. Just this morning CNBC was talking about regulatory capture, suggesting the Fed had reinserted language into regulation that Congress specifically ommitted.

    Sounds like its time for another LD TV appearance on CNBC to define the issue and set the record straight.

    Just a comment, for arguments sake, lets say portfolio hedging is a legitimate way to reduce exposure to specific risks; why can’t banks be required to turn over UNINTENDED profits to FDIC to beef up the insurance fund?

    Since it is not their (banks) intention to generate trading profits but simply to hedge risk exposure, surely the banks would not have a problem turning over their profits on these hedges, right?

  • LD

    haha…Comedy hour starting early here today, heh?

    Not sure how turning over profits would be viewed as consistent with the business model of … “heads we win…tails you lose!!”

    Thanks for the props.

  • LD

    For Jamie Dimon, JPMorgan Chase & Co.’s announcement that it was taking a $2 billion loss on its trading activities was the blood-on-a-leaf moment for his multitude of regulatory and political opponents.

    The loss didn’t just deal a crippling blow to the bank’s arguments to dial back the Volcker Rule, which is intended to stop similar kinds of trading activity, and add ammunitions to those, like the Federal Deposit Insurance Corp.’s Tom Hoenig, that want risky activities separated from commercial banks.

    It also undercut the myth of Dimon himself, a man who has appeared largely invulnerable because he helped lead his bank through the financial crisis mostly unscathed.

    “Of all the banks this could have happened to, this is the one that probably hurts us the most,” said one industry representative who — like many in the banking sector on Friday — declined to speak on the record. “They are the gold standard.”

    JP Morgan Loss Takes Toll on Dimon, Industry

  • Obsvr-1

    Dimon just another evil banker wrapped by a facade of “Responsible Manager of Capitalism”.

    Nothing worse then “Intelligent” criminals. If Dimon wanted to show he was taking “personal responsibility” regarding the $2B Bet, then he should have come out and said I will pay the first $20M back to the shareholders by NOT taking my bonus, Now that would be a sign of responsibility and accountability. It is very easy to say “I take responsibility” when there is no pain associated with the statement.

    Jamie Dimon sounded good in the MTP interview, but I am sure it was all political theater, he should win an academy award for best actor.

  • David T

    So, of course, this hullabalu will renew and strengthen cries to strengthen and enact the Volcker Rule. I’m not so sure we should bother with the Volcker Rule….maybe we should not pass go, and should not collect $200 (billion): maybe we should just go directly back to Glass-Steagal!

  • coe

    Not sure I have the rumors all straight, but one sense was that JPM was “long” credit in one geography to “hedge” exposure in another geography…i.e. writing credit derivative protection in a leveraged way…this seems to make sense, for regardless of protestations to the contrary, the traditional lending machine is sputtering along – hence the wisdom of taking credit risk synthetically..I also heard that the hedge funds, as they poked around in discovery to find who was behind these “whale” trades, found out it was JPM and muscled them around – just because they could…I suspect there was a moment of truth when the affected parties needed to come clean and get Ina Drew and Jamie Dimon involved…we have been in those meetings…that’s when the “spin” doctors talk up and propose ways to staunch the bleeding and go to damage control on the currency..your story about “banging the close” and some late inning reshuffling well prior to the release rings all too possible to ignore, at least in my opinion…why on God’s earth the American taxpayer is subsidizing the “hedge fund” behavior of a Federally regulated bank is a clear mystery and a real shame (if not a crime)…I would call for a simple accounting (in English)…too bad Ina had to fall on her sword for Jamie – she is a pro…if Jamie Dimon had an ounce of honor, he woul;d resign from all his advisory booards (eg the Fed), revamp the policies around the portfolio management, and seriously cvonsider resigning himself to take up the cause of reinstating Glass-Steagal…as credited to Everett Dirksen, ” abillion here, a billion there, pretty soon you’re talking about real money!”

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