"We're getting to the heart of why you own gold" - long time friend and colleague,I think every useful blog under the sun has re-hashed the JP Morgan/Jamie Dimon bombshell dropped on the market last night, so I'm going to try to be brief, to the point and hopefully add some "color" and information that is new.
Wistar Holt (Holt & Shapard Capital Mgmt)
First, Jamie Dimon did a superb job of throwing very expensive, opaque lipstick on the world's ugliest pig and catering the to the Wall Street analysts and media who take what he says and spin it to the public in the best possible light. In fact, I just saw one headline on Marketwatch that said "JPM stock is lower due to a a bad trade." A "bad trade?"
What we just saw last night was the result of Wall Street's equivalent of unsupervised special ed. children playing with financial nuclear triggers. How do I know this? I used to be one of those unsupervised kids back in the 1990's, when the magnitude of the capital being played with was a small fraction of what it is now.
This is not a "bad trade." This is a massive proprietary (i.e. bank trading/speculation portfolio) position that has blown up. Dimon fraudulently refers to it as "an economic hedge" that didn't work as well as they expected.
Jamie Dimon is either completely ignorant of what is going on in JPM's speculation-ridden proprietary trading operation or he's lying. Or a lot of both. If he's clueless, then he should be terminated by the board immediately. If he's lying, he should be investigated by the Obama Justice Department. But we know the latter has no chance of happening, as Eric Holder's Justice Dept has taken financial fraud prosecutions to a 20 year low. Not surprising since JP Morgan and other Wall Street banks are the heart of the client list of Eric Holder's pre-Justice Dept law firm.
With regard to the idea that - as Jamie Dimon put it - this is a $2 billion dollar economic hedge that didn't work. Make no mistake about about it, the true size of this horror is easily several multiples of that reluctantly disclosed "error." This quote is from a good friend who has spent his career at four different Wall Street firms, including the pre-collapse Lehman - in other words, he knows quite a bit about what goes on behind the scenes in bank risk portfolios: "Saying this is less than ten times the disclosed amount is being generous."
What we know for sure is that there is a derivatives trader in London working for JPM who was running a trading/capital position that is thought to be as large as $200 billion. For JPM/Dimon to publicly claim that the embedded loss in this position is only 1% is complete fraud. To begin with, JPM's stated book value as of 12/31/11 is $183 billion. There is no way in hell that JPM would call a surprise conference call to disclose a loss from a bad hedge that amounts to less than 1% of shareholder equity. Even by today's absurdly loose accounting standards, anything less than a 5% event is not considered to be meaningful.
What this tells us is that JP Morgan's liquidity is potentially threatened by what is unfolding in its $78 trillion derivatives book (per recent OCC filings). Even worse, despite all the claims to the contrary, and Dimon's insistence of JPM's "fortress" balance sheet, the risk managers at JPM have no idea how to hedge $78 trillion in exposure and this myth about "net" vs. "notional" derivatives exposure is complete fraud.
The other disclosure by Dimon last night that really irritates - and one that is part of the expensive lipstick he liberally applied - is the remark that JPM has $8 billion in "unrealized" gains in its "available for sale" portfolio. Give me a break. I would challenge Dimon to go ahead and sell those holdings at market and let's see what the real number is. I would not be surprised if what is realizable is a small fraction of that. While we won't know what the true mark to market status of JPM's book value is, I would bet meaningful money that it is less than half of what is being stated in its 10k/10q filings.
Beyond all of this, we really don't know much. JP Morgan did a masterful public relations job at obscuring the facts and minimizing the data and details that would be meaningful to any analyst who is looking for the truth. But we should expect nothing but this kind of useless bullshit given that the Obama Government has made it clear that they are not going to do anything to implement supervision and law enforcement on the group of banks and individuals who have contributed and raised the most amount of money for Obama's 2008 and current election campaigns.
For source material and good articles on some of the numbers I used above, please read these links:
JPMorgan Whale Harpooned?, Financial Times, Bloomberg
Those do not take long to read and will shine some light on the truth in the context of my commentary. Have a great weekend.