Opinion

Felix Salmon

Counterparties: JPMorgan’s giant search for yield

May 22, 2012

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Andrew Ross Sorkin doesn’t think that Glass-Steagall would have prevented JPMorgan’s botched hedges, losses that the Independent says could hit more than $7 billion. But it’s now clear that JPMorgan needed to be saved from itself.

There are two big-picture views of what went wrong in JPMorgan’s infamous CIO office. The first is organizational: The NYT points to a rift between Ina Drew, the CIO head, and her London-based deputy Achilles Macris, whose traders, including Bruno “the London Whale” Iksil, were much more comfortable embracing risk. “No one could sufficiently push back against Achilles, so he and Bruno could do what they wanted,” a former trader said. In this view, Drew, who took an unfortunately timed medical leave because of Lyme disease, simply lost a power struggle with London traders.

The second view is that JPMorgan’s CIO office – which was meant to manage the bank’s risk – was chasing returns in a way that its rivals simply weren’t. Bloomberg breaks down JPMorgan’s outsize love for corporate bonds:

About half of the $381.7 billion in JPMorgan’s chief investment office portfolio is in company bonds, asset-backed securities and mortgage debt not backed by the U.S. government, according to a March 31 filing. That compares with 7.7 percent at the end of 2007. The amount, $188.1 billion, is more than the holdings of such securities by its three biggest competitors combined. It exceeds the total assets of Atlanta-based SunTrust Banks Inc., the 10th-biggest U.S. lender…

JPMorgan has about 30 percent of its holdings in U.S. Treasuries and bonds issued or guaranteed by U.S. government-backed agencies, according to its filings. That compares with 87 percent at Bank of America, 50 percent at Citigroup and 47 percent at Wells Fargo.

This is “an indication that they’re searching for yield like other money managers,” an analyst told Bloomberg. But JPMorgan is not your average money manager; there is, for one, the sticky issue of what a too-big-to-fail (TBTF) bank does with your deposits (other than lend). And whether JPMorgan was hedging or doing something a bit more like prop trading, as Deus Ex Macchiato puts it, JPMorgan is just “too big”, and as a result “simply finding a reasonably safe home for that $400B is quite difficult.” – Ryan McCarthy

On to today’s links:

EU Mess
iPads with a custom-made debt-restructuring app saved Greece billions – Fortune

Facebook
Facebook’s lead underwriter cut its forecast during the company’s IPO roadshow – Reuters
SEC, FINRA are calling for a review of Facebook’s IPO – Reuters
A hedge fund manager with $100m invested in Facebook is awfully angry at NASDAQ – BI
The Facebook earnings-forecast scandal – Felix

Wonks
China’s economy: Macro successes and micro failures – Robert Skidelsky
After Neoliberalism, now what? – Dani Rodrick
Jonathan Swift, the father of microfinance – Marginal Revolution

Alpha
Ray Dalio explains “beautiful” deleveraging – Barron’s

A beautiful deleveraging balances the three options. In other words, there is a certain amount of austerity, there is a certain amount of debt restructuring, and there is a certain amount of printing of money. When done in the right mix, it isn’t dramatic. It doesn’t produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down. That’s a beautiful deleveraging.

Welcome to Adulthood
“Members of the class of 2012 … You’re f*cked” – Robert Reich
1 in 2 recent college graduates are jobless or unemployed – AP

TBTF
Your latest too-big-to-fail firms: Swaps clearinghouses – Bloomberg

Reversals
By not losing, Goldman Sachs became a winner again – Forbes

Reuters Opinion
JPMorgan loss kick-starts the CEO race – Rob Cox
Equal rights and the U.S. economy – Chrystia Freeland
How Gawker wants to monetize comments – Felix
What is the long-term euro vision? – Hugo Dixon

New Normal
Only 4 states have returned to pre-recession employment – Economix
Stark images of abandoned malls and big-box retailers – The Morning News

Bubbly
AmEx to offer debit card rewards in FarmVille cash – All Things D

Stuff We Are Not Linking To
Fortune launches “Fantasy Sports, Executive League

 

Comments
2 comments so far | RSS Comments RSS

That Rodrik essay, After Neoliberalism what?, dates from 2002.

Posted by nyet | Report as abusive
 

“1 in 2 recent college graduates are jobless or unemployed”

That should read, “jobless or UNDERemployed”.

Bad news for many, but “average” just isn’t good enough these days.

Posted by TFF | Report as abusive
 

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