A couple of weeks ago, JPMorgan Chase CEO Jamie Dimon warned investors specifically, and the public generally, that the bank was suffering some rather acute losses in its CIO – Chief Investment Office – which might adversely affect earnings for the next several quarters. Was this announcement pre-emptive candor or a sleight of hand hiding more ominous news? We vote for the latter.
The American financial and political worlds are rife with criminal behavior emanating from the most august board rooms and pedigreed persons on Wall Street. While Dimon is no exception, his perch at the largest bank in America gives his crooked deeds added weight. Why did the CEO announce unrealized losses of around 2 billion USD for an institution with a market capitalization of 150 billion USD? Although the amount was substantial, even in times when bandying about trillion dollar amounts is par for the course, most other banks would have swept it under the rug through creative accounting.
The press conference was a mixture of confession and legerdemain. Dimon was signaling that he and his irresponsible management had lost control of certain markets, and that he would probably need more bailouts before the dust settled. The problem is that we are not dealing with private investments or even hedges, but with US debt and finances for which JPM is syndicate lead.
Dimon thought that by coming forward with the bad news while it was small, he could show statesmanship and earn PR brownie points ahead of the down curve by letting out some bad news early on the notion that it would become ho-hum when feces flew from the proverbial fan blades. That strategy may be the case given that so many crises are swirling around the US, Europe, and China to give cover for JPM's troubles.
The point of Dimon’s confession was that some trades involving European debt had turned bad due to the slump in European bond prices. How the trades soured when European debt markets were buoyant relative to their recent instability was never explained.
Some analysts pointed out that JPM was hedging its hedges which would be a rather illogical thing to do but even more so when it held many naked short positions. The trades involved some rather arcane derivatives in Investment Grade 9 and 18 CDSs.
Many thoughtful commentators pointed out that the losses would be much larger than the 2 – 2.5 billion USD reported by the JPM CEO. Zero Hedge already calculated at least 5 billion USD in losses while more aggressive analysts show 18 – 33 billion USD in capital destruction. The 33 billion dollar figure stems from Fed chairman Ben Bernanke telling Dimon during stress tests earlier in the year that he could not proceed with share buy backs and dividends if losses at the bank reached 33 billion. The CEO announced last week the suspension of his 2 month old plan to buy back shares and increase dividends.
But does European bond trouble explain the problem at JPM? Not by a long shot. The bank is at best a gambling casino and at worst a criminal enterprise. Forensic financial analyst Rob Kirby reported that the real derivative which is at the root of the problem is Interest Rate Swaps (IRS), a derivative requiring the purchase of bonds. JPM has over 80 trillion USD in notional exposure to IRS.
As the leading government functionary for government finances, JPM has a massive book of these swaps in order to manipulate the prices of bonds upwards which of course keep interest rates low. Indeed, Bernanke instituted the capital destructive ZIRP program in the wake of the 2008 financial crisis in order to finance the multi-trillion dollar deficits which Obama instituted when he was installed as president.
The size of the IRS pool is ginormous, requiring death defying feats of dare to manage in the face of perpetual trillion dollar deficits. The upward pressure on interest rates is enormous – a fact which makes the low interest rate regime remarkable. However, repudiating gravity is not a wise or long term strategy promising much success.
As the IRS and their accompanying CDS grow, the instability of that complex trebles. The fallout of the triggering of IRS at even small levels would be of Biblical proportions, making Lehman Brothers’ collapse sound like a gnat’s fart in comparison. One analyst sees up to 500 billion USD in losses at JPM.
Two other observations emerge from the desperation at JPM. We now have probable cause to accuse JPM of stealing MF Global segregated account money to prop up its bad trades.
We also understand why the government has been issuing more debt than it needs. It wants to bailout its chief banking partner from its casino trades, which company has a voracious appetite for IRS which in turn has a huge craving for bonds.
The criminal and corrupt Wall Street and Washington alliance has heard the Fat Lady clear her throat. The troubles in Europe are real and larger than reported but they are dwarfed by the troubles stirring in the United States’ debt markets. We are witnessing the onset of nuclear winter. JPM will make tsunami waves in the future. Keep your eyes on its caldron of radioactive proprietary trading which reflects the complete meltdown in US government finances.
USTBond Tower of Babel Teeters, Jim Willie, May 23, 2012
JPMorgan’s Senior Officers’ Addiction to Gambling on Derivatives, William Black, May 23, 2012
Copyright 2010-12 Tony Bonn. All rights reserved.