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.
References
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.