Counterparties – Jamie Dimon and JPMorgan’s risk question

By Ben Walsh
April 13, 2012

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This morning, JPMorgan reported $5.4 billion in earnings, or $83 million per weekday. While management trumpeted the increased strength of the company’s “fortress balance sheet” (trademark pending), they also pushed back on a Bloomberg report that a bank division called the Chief Investment Office had shifted from risk management toward large-scale speculation.

The CIO division, of course, is where the now infamous trader known as “Voldemort” works, and Bloomberg has compiled more evidence that the bank could have trouble with the Volcker Rule. Bloomberg’s reporting contradicts JPMorgan’s description of the CIO as a division that uses approximately $360 billion in excess deposits to manage risk, not to make bets for its own account:

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon has transformed the bank’s chief investment office in the past five years, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes.

Achilles Macris, hired in 2006 as the CIO’s top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said. Dimon, 56, closely supervised the shift from the CIO’s previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

On today’s earnings call, Dimon called the story a “tempest in a teapot.”

Dimon’s comments are hard to square with one of the CIO division’s traders writing a reported $100 billion in protection on a single CDS index. Similarly perplexing was Dimon’s statement that, because of CIO investments, JPMorgan would profit from rising rates.

Given Dimon’s tone this morning – “It’s like having mozzarella for pizza, when it goes up a little your margins go down a little bit … that was a dumb analogy,” he said at one point – it’s unlikely we’ll get much more information about the bank’s risk-taking.

Dimon joked: “I constantly read about counterparties.” While we’re secretly hoping he’s talking about us, the bank’s actual counterparties are likely still waiting for answers.

And on to today’s links:

Must Read
JPMorgan division is ramping up speculative bets in “an unprecedented build-up of credit risk” – Bloomberg
Full text: The JPM Q1 earnings release – JPM
Full text: The Wells Fargo Q1 earnings release – Wells Fargo

Modest Proposals
Sheila Bair: $10 million loans for every American – WashPost

Charts
The geography of America’s job market recovery – The Economist
The 1% and the 99% – The political economy in 4 charts – The New Yorker
“A debate on inequality, opportunity and politics” – Jared Bernstein

EU Mess
A disturbing look at extreme right-wing, anti-immigrant movements growing in Greece – NYT
Amartya Sen: “There is a democratic failure in Europe” – Economics Intelligence
Europe has a “recession strategy that makes austerity and reform self-defeating” – Roubini

Reversals
Goldman Sachs tries a new approach: Engaging with pissed-off shareholders – WSJ

Euphemisms
Your illustrated guide to “pink slime”, “white slime” and “advanced meat recovery” – ProPublica
How a “meat innovator” has been nearly destroyed by the “pink slime” scandal – Bloomberg

Defenestrations
Best Buy looking into whether former CEO had an inappropriate relationship with an employee – Star Tribune
It could take 6-9 months for Best Buy to name a new CEO – Reuters

Worrisome
China’s GDP falls to a 3-year low in Q1 – Reuters

Rational Markets
AOL’s patents and the case against the efficient markets theory – Bloomberg Businessweek

Oxpeckers
How 25 National Magazine Awards went to 25 male writers – The Awl

Regulations
Two companies have already filed confidential IPO plans under the JOBS Act – WSJ

Big Numbers
Instagram added 10 million users in just 10 days – TechCrunch

Remuneration
Lloyd Blankfein’s $12 million pay package – NYT

Awesome
18th century shipping mapped using 21st century technology – The Guardian

Comments
6 comments so far

As we know from AIG the issue with alot of these investments is that you end up with your “excess liquidity” in illiquid products at the exact same time it is no longer “excess”. But hey who cares, we are all focused on prop trading and capital reserves to worry about liquidity coverage…

Posted by Danny_Black | Report as abusive

“On today’s earnings call, Dimon called the story a “tempest in a teapot.” (FS)

Well, I guess that settles it then – no big deal. The rabbis on the Street know what’s best, don’t they Danny? After all, they got us to where we are now, didn’t they? We “muppets” should thank our lucky stars for the privilege of having them take such good care of us.

Posted by MrRFox | Report as abusive

@MrRFox when you repeat nearly verbatim something from Rolling Stone or MSNBC daily and expect credibility for it… I mean, don’t you deserve to be called a ‘Muppet’ at that point? All you know about banking and finance is that you don’t like it, nor the people involved. Congratz! Sound like a modern American to me – I dunno know wat it is but I shure ain’t likin it. Or maybe you’re just a troll…?

Posted by CDN_Rebel | Report as abusive

@CDN_Rebel – What? All my post did was bow-down before my masters on the Street, and express gratitude for the selfless devotion to the general welfare that motivates all of their actions. For God’s sake, you didn’t take any of that (or this) as sarcasm, did you?

Posted by MrRFox | Report as abusive

Minor point, your headline “China GDP falls…” lead to an article on hina’s 8.1% growth rate. Cheap.

Posted by jonners | Report as abusive

I was looking at Chart 16 here (the “real output gap”):
http://www.treasury.gov/resource-center/ data-chart-center/Documents/20120413_Fin ancialCrisisResponse.pdf

Am I the only one seeing a trend line that fits both 2000-2003 and 2009-2011 quite nicely? We know there was some crazy stuff going on between 2004-2008. Why is that presumed to be “normal” output? Is there some longer-term rationale for placing the trend line that high? (How can there possibly be, when the economy has changed so much in the last 30 years?)

Posted by TFF | Report as abusive
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