Jamie Dimon’s prepared remarks released tonight show the common problems of a TBTF bank in the new Basel regime. That means that the bank increased its risk exposures based on the Basel 3 regime, especially after the CIO office in question was also instructed to reduce its exposures both in the synthetic and the other Fixed income portfolio. The CIO’s office according to the remarks decided to increase its bond and CDS holdings to achieve the reduction in risk. An easier and more common solution in the new Basel 3 regime would be to sell off or dispose existing bond holdings to banks and financial services/investment firms that need the risk exposure.
In December 2011, as part of a firmwide effort in anticipation of new Basel capital requirements, we instructed CIO to reduce risk-weighted assets and associated risk. To achieve this in the synthetic credit portfolio, the CIO could have simply reduced its existing positions; instead, starting in mid-January, it embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones. This strategy, however, ended up creating a portfolio that was larger and ultimately resulted in even more complex and hard-to-manage risks.
This portfolio morphed into something that, rather than protect the Firm, created new and potentially larger risks. As a result, we have let a lot of people down, and we are sorry for it.
That the Whale Trader chose to add positions in an illiquid market is an unfortunate result of the banks’ propensity to hold on to existing securities in the illiquid market even in the face of a strict objective to reduce the risk
Most of the additional risks of a complex strategy would come from the tranches of illiquid assets whose characteristics on risk/return need to be assumed more to theoretical constraints than the reality which is further skewed by market participants knowing each other. In the case of JP Morgan this was decided by traders taking for and against positions vis a vis Bruno Iskil’s portfolio including Bruno Iskil himself
Also in the face of a new Basel 3 regime, these examples would serve as a reminder to other TBTF banks trying to reduce risks to consider primarily reducing holdings to reduce the risk even in Illiquid markets and there also comes the Banks’ requests to hold off on Dodd Frank limitations including a clampdown on market making activities and portfolios in illiquid markets.
JP Morgan’s Foreign bonds portfolio have risen by $75 B in the period as the bank tried to adjust to a post Basel 3 scenario. It has also added $17 B in its holdings of bonds.
The rest of the prepared statement also points to JP Morgan’s $62 B in outstanding Consumer Credit and $116 B in Credit to Corporates. I t also seems to have added $4B in its small business lending program. It added 61,000 employees during the crisis years.
Matt Zames and Mike Cavanagh need to take responsibility for their new roles in managing and actually containing risk, but still maintaining a healthy Return on Equity as the Basel 3 conditions make it prudent to really add Capital and/or reduce RWA profile and holdings for a safer banking superstructure, meaning an unheralded challenge in maintaining profitable markets.
- Guess Who’s Investigating JP Morgan’s Fail Whale Trades, Now Up to a $7 Billion Loss?(news.firedoglake.com)
- The Problem at JPMorgan Chase: The Hedge Fund Inside the Bank(news.firedoglake.com)
- Bruno Iksil and the CHIPS trade(blogs.reuters.com)
- JPMorgan’s Jamie Dimon Heads to DC(valuewalk.com)
- JPMorgan stops stock buys, cites need for capital(sfgate.com)
- Fed Proposes Bank Capital Rules;Mostly Complying With Basel 3(forexlive.com)
- Dimon to apologize in testimony before Congress(kansascity.com)
- Dimon’s sorry, sees profitable quarter for bank(marketwatch.com)