Friday, April 13, 2012

The Squid and the Whale (Not A Children's Story)


I said from the beginning, keep your eye on Jamie Dimond. He not only thinks he's the cleverest of the foxes, he probably is.

April 13, 2012
 
Jpmorgan Chase White Whale
 
JPMorgan Chase is the white whale of the global economy.

Never mind the Squid. Keep your eye on the Whale.

JPMorgan, that is, which is not nearly as vilified as Goldman Sachs, but is bigger and potentially far more important to the global economy than the Vampire Squid.

With its size, reach and critical role in the still-thriving shadow banking system, JPMorgan will almost certainly play some role in the next financial crisis, whenever it happens.

JPMorgan is now the country's biggest commercial bank by assets, with nearly $2.3 trillion, a number that has increased since the financial crisis. It is also now the biggest investment bank in the entire world, Reuters reported on Thursday, citing a report by a research group called Coalition. Second on the list? The first loser, in other words? Goldman Sachs.

Along with Wells Fargo, the biggest U.S. bank by market valuation, JPMorgan is due on Friday to kick off a slew of first-quarter bank earnings reports. Bank profits are shrinking, with lending slow to recover from the recession and trading volume in stocks and bonds depressed. JPMorgan's earnings are expected to fall to $1.16 a share from $1.28 a share a year ago, according to an Investors Business Daily report. And that's supposed to be one of the better bank earnings reports.

But JPMorgan is still the standard-bearer for the banking industry in more ways than one.
"Many investors consider the bank an important indicator, especially any future guidance management offers, since the financial sector is so critical to the overall trajectory of the Standard & Poor's 500 index," Barrons columnist Steven Sears wrote on Thursday.

The bank is one of the few of the too-big-to-fail set that can claim with a straight face that it didn't need a bailout during the crisis. Its golden-boy CEO Jamie Dimon is the industry's de facto spokesman, frequently delivering long-winded expositions on the virtues of banking and the evils of regulation.

Goldman Sachs, meanwhile, is still hands-down the most-hated bank in the country, thanks largely to the efforts of Matt Taibbi, who hung the firm forever with the "Vampire Squid" moniker for its deeds before, during and after the financial crisis.

But Goldman's tentacles seem a little tangled right now. Lloyd Blankfein, who once had a Dimonesque moment in the sun, claiming that Goldman did "God's work," is now busy defending his position at the firm, according to reports. Greg Smith's splashy departure cemented the firm's reputation for evil and left it hunting for Muppets.

As for the second-most-hated bank in America, Bank of America, it is busy shrinking itself, and even suing itself from time to time.

Meanwhile, the good name of JPMorgan, which escaped from the financial crisis without taking much damage, has lately been popping up with increasing frequency in unwelcome ways.

Bloomberg reported last week that a JPMorgan credit-derivatives trader in London has such a massive position in derivatives that he is warping the $10 trillion market for credit default swaps. Lots of market experts shot holes in the report as overblown, but the trader's nicknames -- "Lord Voldemort" and "the London Whale" -- offered a lingering visceral punch. And there's no doubt JPMorgan is the biggest player in the derivatives market now, for better or worse.

Update: Bloomberg has fired back at the critics with another story on Friday, saying the bank has turned its sleepy chief investment office into a massive proprietary trading desk, a group that includes The London Whale. JPMorgan spokesman Joe Evangelisti has described this desk as purely a risk-management operation, not a profit center. Bloomberg and its sources beg to differ.

JPMorgan has a similarly huge position in another market that gets a lot less attention: the tri-party repo market, where companies take out very short-term loans to finance their day-to-day operations. This market was a death zone for Bear Stearns and Lehman Brothers during the crisis. JPMorgan and BNY Mellon sit in the middle of this market making very short-term loans, Peter Eavis of the New York Times pointed out recently, meaning they could either be crushed, or do some crushing, if that market goes haywire. A Fed task force wanted JPMorgan to cut back its lending by the middle of last year, a goal that was decidedly not met, Eavis writes:

Specifically, the task force expected JPMorgan and BNY Mellon to cut their extension of intraday credit to no more than 10 percent of the total size of a borrower’s tri-party repo trades. But that goal was missed and intraday credit remains at very high levels.
JPMorgan's role in the tri-party repo market, nearly $2 trillion in size, gives it the power to decide whether rival banks live or die in the next financial crisis. And it has been close at hand for the demise of three such banks since the crisis.

The firm was ordered earlier this month by the Commodity Futures Trading Commission to pay a $20 million fine for letting Lehman Brothers take on too much credit just before it collapsed in 2008, improperly counting client money as collateral. It is still defending a lawsuit from Lehman that claims JPMorgan forced Lehman into bankruptcy by demanding more collateral while it was in its death throes, the Financial Times noted recently.

That news came after questions had been raised about JPMorgan's receipt of $175 million in MF Global client funds while the smaller firm was collapsing. The bank says that MF Global assured it that the $175 million was not clients' money.

JPMorgan was also involved in rescuing Bear Stearns when it went down in 2008. Referring to its relationships with Bear Stearns, Lehman and MF Global, the Financial Times wrote recently that JPMorgan was "Three times a pallbearer, never a corpse." The FT added: "Its unrivalled reach raises inevitable questions about its role."

And like many other banks it is being sued left and right for mortgages it sold to investors that later went bust, a headache that could potentially cost the firm billions, Bloomberg writes. In a letter to shareholders earlier this month, Jamie Dimon said it would fight these lawsuits relentlessly, saying those who bought the mortgages were "sophisticated investors who understood and accepted the risks."

None of this has much bothered JPMorgan shareholders, who have driven the company's stock up by nearly 60 percent since last November. JPMorgan has faced nothing like the PR nightmare experienced by Goldman Sachs last year, with Taibbi's report and the Senate subcommittee report on Goldman's role in the financial crisis that prompted it.

That doesn't mean we shouldn't have somebody up in the crows nest keeping an eye on JPMorgan.
JPMorgan spokesman Joe Evangelisti declined to comment.

Update 2: JPMorgan on Friday reported quarterly earnings that beat Wall Street forecasts.




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