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JP Morgan Whale: “Thar She Blows”

Posted by Larry Doyle on May 11, 2012 6:02 AM |

Less than a month ago, JP Morgan released very solid 1st quarter 2012 earnings and put out the following release:

New York, April 13, 2012 – JPMorgan Chase & Co. (NYSE: JPM) today reported first-quarter 2012 net income of $5.4 billion, compared with net income of $5.6 billion in the first quarter of 2011. Earnings per share were $1.31, compared with $1.28 in the first quarter of 2011.

Jamie Dimon, Chairman and Chief Executive Officer, commented on financial results:

“The Firm reported strong revenue1 for the first quarter of 2012 of $27.4 billion, up 24% compared with the prior quarter and up 6% compared with prior year. While several significant items affected our results, overall, the Firm’s performance in the first quarter was solid. The Firm’s return on tangible common equity1 for the first quarter of 2012 was 16%, compared with 11% in the prior quarter and 18% in the prior year.”

Dimon continued: “We are pleased that our results for the quarter reflected positive credit trends for our consumer real estate and credit card portfolios. Estimated losses declined for these portfolios, and we reduced the related loan loss reserves by a total of $1.8 billion in the first quarter. However, with respect to our Mortgage Banking business, we expect to see elevated levels of costs and losses associated with mortgage-related issues for a while longer. Credit trends across our wholesale portfolios were stable and continued to be strong.”

While Dimon drew attention to ongoing costs and issues within its mortgage business, he certainly gave no hint regarding potential reason for concern within the bank’s overall credit exposures. In fact, for an investor with exposure to JP Morgan, when Dimon says. . .

Credit trends across our wholesale portfolios were stable and continued to be strong.

you feel pretty good, and you probably head to the driving range or the golf course to work on your game.

Well, put away the clubs.

Last evening, Mr. Dimon told the market that a portfolio managed within its Chief Investment Office took a $2 billion hit. Widespread speculation has it that this portfolio was managed (I use that term loosely) out of JPM’s London office by a trader designated as “The Whale.”  Well, with a $2 billion hit, it is only appropriate to say, “Thar she blows.”

The Wall Street Journal offers closer inspection of this blowup in writing, Costly Position Was Wager on Corporate Debt Gone Wrong:

The trade that cost J.P. Morgan ChaseJPM +0.25% $2 billion in losses in just six weeks was likely a complex bet on derivatives linked to corporate debt. James Dimon, J.P. Morgan’s chief, didn’t give details of the trade on a conference call with analysts.

But The Wall Street Journal reported in April that a London-based J.P. Morgan trader, Bruno Michel Iksil, had been selling protection on an index of 125 companies in the form of credit-default swaps through most of January and February. That meant he was essentially betting on the improving credit of those companies in the index and would lose money if the market went the other way.

Mr. Iksil did so much bullish trading that he helped move the index, traders said at the time, prompting some hedge funds to bet against him in the belief he might have to exit some of his bullish trades.

Having witnessed traders who have had enormous positions relative to an overall market size, very often the position controls the trader rather than the trader controlling the position. Dimon eluded to this dynamic last evening by indicating the firm will very likely maintain this position for an extended period. Why is that?

JP Morgan could not likely unwind any meaningful part of this position without significantly and adversely moving the market. As a result, the JP Morgan whale is likely all locked up, although still subject to market fluctuations.

Rest assured, every other market participant will be “whale watching” very closely and will welcome the opportunity to extract a pound of flesh whenever possible.

While there will be plenty of whale watching, those holding exposure to JP Morgan should also be livid with Mr. Dimon. The all too often sharp tongued “top banker on Wall Street” had specifically stated that concerns regarding positions within the Chief Investment Office amounted to little more than a “tempest in a teapot.”

Well, that pot more than boiled over and Dimon now deserves to feel the heat.

Did I hear somebody say this type of trading activity is why we need the Volcker Rule?

JP Morgan’s stock is down close to 8% in overnight trading.

Navigate accordingly.

Larry Doyle

Isn’t it time to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook?

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.

  • Andrew

    The problem was that they did not have Jon Corzine to help them manage the risk!

  • LD

    …or maybe this $2 billion hit is an indication that Corzine was involved. haha…

    • Peter S.

      Corzine couldn’t possibly have had time to be involved – he still trying to remember where he put the 1.6 billion from his own boondoggle.

  • Peter S.

    Who said the banksters haven’t gotten it – Volcker anyone?

  • LD

    This clip gives a good overview of the conference call Jamie Dimon had last evening. Also provides interesting review of questions delivered by noted banking analyst Mike Mayo:

    JP Morgan Loses $2B After ‘Egregious Mistakes’

  • LD

    Another fabulous Bloomberg discussion on this topic. The commentators discuss the pressure this puts on JPM, Wall Street in general, regulators, and the markets…

    A 10-minute clip and well worth viewing…

    Blood In The Water

  • michaelD

    how is this not a clear, prosecutable, violation, of sarbanes-oxley?

    • LD


      I believe if JPM had not come out now — when it was more fully aware of the nature of the positions and accompanying mark to market losses — that Dimon and team could be held to account.

      One could make the strong case that Dimon and team were too lax in managing the risks and positions, BUT they cannot be criticized for bringing this to the market’s attention now.

      All this said, there have been such egregious violations of SarbOx over the years that I am not sure it is still viewed as a viable piece of legislation.

      • michaelD

        them coming out now isn’t the issue though, is it? they just filed a 10-Q which the CEO and CFO have to swear under severe penalty that its true and correct to the best of their knowledge. the NYT has broken info that US and GB regulators have been aware of and discussing this issue for a month or so now. clearly TPTB at JPM were aware that something was amiss when the 10-Q was signed, sealed, and sworn.
        alas, i have to agree with your assessment of sarbox [its viability] which is very much congruent with many many other ‘laws’.

  • fred


    The bigger question to be asked and answered is why is the public backstopping financial institutions that do prop trading?

    These banks are engaging in prop trading and then telling regulators and the public that its not prop trading but hedging.

    P L E A S E, commercial banking risk is easily measured, effective commercial bank hedging is just as easily measured.

    Now that JPM has been exposed as a liar what do we do now?

    • LD


      There is NO doubt that the Volcker Rule needs to be implemented, BUT I think it will be a while before it is phased in. Why? The size of the markets, especially the CDS markets, can only function with the active and ongoing participation of the large banks.

      I feel strongly that the banks themselves have informed the Fed and Treasury and assorted regulators that the “derivatives monster” is SO large that it can only be kept in its cage by the big banks themselves. If the Volcker Rule were to be implemented, in relatively short order the markets would wonder just who the hell is going to be a credible and sufficiently well capitalized counterparty for all of the existing CDS — let alone new transactions.

      The banks literally have the regulators and Washington by the balls given how large the derivatives markets have grown.

      • fred

        LD, are you saying that banking regulators didn’t/don’t require reserves or adequate hedges to offset CDS exposure? If not, why are banks reducing reserves to pay dividends?

        • LD


          All part of the shell game being played…

          Come on in, come on in, come on in….

          . . . if we had regulators like this guy with the camera, perhaps we might have a little more confidence in our system. Pardon the language used by some of the people involved.

  • LD

    John Makin of the American Enterprise Institute issued the following statement today:

    JP Morgan fiasco demonstrates the ineffectiveness of Dodd-Frank
    John Makin

    Coming on top of renewed turmoil in Europe that has increased the selling of European bank shares, JP Morgan’s announcement of a $2 b. trading loss, with more to come, sharply raises the perceived risks of U.S. bank shares. This news will severely undercut JPM’s reputation as the best-run U.S. bank and pushes global markets to another encounter with systemic risk.

    The Fed faces a difficult choice. The need to counter the impact of financial uncertainty on the economy has risen, while the opposition to doing so has also increased in view of JP Morgan’s apparent willingness to embrace risks that it does not understand and/ or cannot manage. In the short run, expect Bernanke’s assurance that the system is sound and that the Fed stands ready to meet any liquidity needs. Over the longer term, the Fed will want to put bankers on a shorter tether, that limits proprietary trading.

    At the very least, the JP Morgan fiasco demonstrates the ineffectiveness of Dodd-Frank as a viable guardian of financial stability. The problem is structural. Depository institutions that enjoy protection afforded by deposit insurance and their absolute large size—too big to fail—should not be allowed to engage in proprietary trading. Time to implement the Volcker rule.

  • Chris F.

    Dear Larry:

    After JP Morgan’s Jamie Dimon lost $2 Billion in risky trading, today, AFSCME issued a renewed call for the shareholders of JPM to end Dimon’s reign as Chairman and CEO and adopt an independent board chair.

    AFSCME President Gerald W. McEntee, also a trustee for the AFSCME Employee Pension Plan issued the following statement:

    AFSCME Plan to JP Morgan Chase: “Don’t hedge on Independent Board Chair; the stakes are too high to leave Jamie Dimon unsupervised.”

    Statement of AFSCME Plan Trustee Gerald W. McEntee on JP Morgan Chase $2 Billion Loss

    “Wall Street greed and conflicts of interest drove our economy into a ditch. JP Morgan Chase shareholders need to act together and tell the board that we want meaningful controls over risk and real oversight of management. We need an independent chairman of the board. The stakes are too high to leave Jamie Dimon unsupervised.

    Dimon denied that the ‘London Whale’ was making risky bets, and now that this has turned out to be a fish story, shareholders need to step in.”

    JP Morgan Chase (JPM) shareholders will vote next Tuesday May 15 at the company’s annual meeting on a shareholder proposal submitted by the AFSCME Employees Pension Plan (“the AFSCME Plan”) calling on JPM to adopt an
    independent board chair who will provide improved oversight and risk management.

    The AFSCME Plan views the proposal as an important way to protect and enhance the economic value of its long-term investment in JPM because an independent board chair will refocus the company on better managing its economic risks,
    which will in turn protect and improve the value of its shares.

  • Jeff

    LD! My man. I haven’t heard a particular point, a point which I immediately thought of when the story broke, what about their role in ISDA!

    I realize JPM is just a member of the group that comprises ISDA, but what about how much pull they have with other swap dealers on deciding what is and what is not a credit event?

    If they are taking large short positions on CDS’s, and then ultimately deciding whether a credit event has occurred then this is major market manipulation. That’s a major problem! Take Greece CDS’s, there should have been a credit event.

    • LD


      Here’s the sitch.

      Those like JPM occupy the following seats:

      1. Dealing the cards.
      2. Sitting upstairs in the darkened windows with monitors all over the floor.

      Regulators (ie FINRA) whom they and their Wall Street brethren pay are supposedly walking the floor keeping an eye on the dealers BUT they are seemingly more tipping off management upstairs or slapping them with token fines for appearance sake.

      The ISDA credit event charade is all part of the game.

      Be careful and remember only play with $$$ you can afford to lose.

  • Bill

    This fiasco reminds me of advice I got from my father decades ago: never invest in something you don’t understand. Amazing the regularity with which these financial wizards violate that simple rule.

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