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More indications today that the Fail Whale trades were far more consequential for JPMorgan Chase than anyone is making it out to be. Reuters looks at the furious sell-offs JPMorgan Chase has engaged in over the last month:
JPMorgan Chase & Co has sold an estimated $25 billion of profitable securities in an effort to prop up earnings after suffering trading losses tied to the bank’s now-infamous “London Whale,” compounding the cost of those trades.
CEO Jamie Dimon earlier this month said the bank sold corporate bonds and other securities, pocketing $1 billion in gains that will help offset more than $2 billion in losses. As a result, the bank will not have to report as big an earnings hit for the second quarter.
The sales of profitable securities from elsewhere in the bank’s investment portfolio will increase its costs by triggering taxes on the gains and by eliminating future earnings from the securities.
This basically is an accounting gimmick, a shift from one end of the books to the other to mask the trading loss.
But it also concedes some longer-term gains. And at $25 billion, the size of the sales suggests that the Fail Whale trades could come out much larger than currently reported. Remember, this is on top of the suspension of a $15 billion share buyback program JPMorgan Chase announced last week. If they’re forgoing profitable securities to hide the losses, that gives more evidence that the losses are massive. This will generate a long-term hit to the bank’s profitability. And in the event of a Euro crisis or another big trading loss or anything triggering a sharp downturn, suddenly JPM’s bullet-proof balance sheet has a few holes in it. And that’s when taxpayer dollars typically get involved.
So while everyone is out there claiming that the Fail Whale trades don’t represent a systemic risk, you can see through the weeds examples of precisely the opposite. And this gives more credence to the view that we need to end risky prop trading inside commercial banks.
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I’m sure the market can see through this game of mirrors. It’s not like there’s anybody stupid with money to burn left out there.
And all you folks with thousands of $$$ parked in your JP Morgan/Chase health savings accounts don’t have a thing to worry about. Jamie would never raid your account to prop up his ALL important bottom line.
Really, he wouldn’t.
Just ask Jon Corzine…..
But not to executive bonuses.
The size/dimensions of the corruption is/are starting to resemble that of the seven oligarchs of the former Soviet Union.
In other words, vast.
how long can this go on?
wow.
Time for our trustworthy and ever-vigilant media to cue up a missing white girl story, or perhaps an exposed nipple….something, and quick.
I am trying to understand the logic that says what JPM is doing is unusual or bad or adds to the loss from the mis-match between the hedge and the value of the securities it was hedging.
A hedge by definition protects the value of a security – you spend a little for the hedge so the value of the security less the value of the hedge is stable. If you sell the hedge you can only get stability by selling the security at he same point in time – and you are a success at the hedging game if the decrease in the value of the security is offset by the increase in the value of the security.
So the security sales “capital gains and its tax” are offset by the “hedge loss and its tax credit”. What is the big deal?
The gambling aspect that should never have happen was the use of a hedge that was so imperfect that it only partially offset the security movement – and indeed was not matched to assets that were to be hedged. This does not change – there is a $3 to 5 billion loss – but the closing out of the hedge would of course involved the sale of securities.
Now those securities capital gains could be from a period before the hedge was put into place – in which case this is just more bad management – but we do not know that. Indeed it may simply be an attempt to reduce the loss by taking down a past tax liability at the same time you now have a new large tax credit from the hedge loss – a minor savings to be sure but that would be good management.
The only real question is how do we stop bankers gambling with hedges. The sale of securities provides us with no new information.