Weekend Economists: What Goes Up....June 1-3, 2012

[Demeter]

78. Michael Crimmins: Jamie Dimon’s Illegal “Cookie Jar”

http://www.nakedcapitalism.com/2012/05/michael-crimmins-jamie-dimons-illegal-cookie-jar.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

The bad news just keeps on coming in the JP Morgan CIO scandal. We’re getting a lot of salacious detail, but the media manages to continue to miss the bigger picture. On Tuesday, David Henry at Reuters coined a wonderful catch-phrase that should prove difficult for JPMorgan to explain away to its depositors and to the rest of us - “JPMorgan dips into cookie jar to offset ‘London Whale’ losses”.

The main point of the article is that the ‘cookie jar’ contains $8 billion of unrealized gains from the profitable investment of excess deposits. The tricky bit for JPM, its depositors and inquisitive regulators, investors, external auditors, and disgusted citizens is explaining why $1 billion of that reserve was gifted to the CIO desk to cover its trading losses. Trickier still is Dimon’s pledge of the entire $8 billion to cover any further CIO trading losses. Henry reports:

‘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.’

The story estimates that JPM sold $25 billion of the Investment portfolio assets to generate the initial $1 billion gain used to offset the $2 billion losses Dimon disclosed in the May10 press conference. There is no word yet on the size of the losses JPM has incurred since the announcement.

The size of the investment portfolio was reported as $381 billion as of March 31, 2012. At that time the $381 billion portfolio contained underwater assets of $84 billion. Those underwater assets were worth $1.4 Billion less than JPM paid for them. JPM can’t sell them without realizing additional losses, so they will probably not be touched. That leaves investments of $297 billion that can be sold at a profit. The unrealized profit on these items was reported as $9.8 billion as of March 31, 2012. Since then JPM has liquidated assets in the portfolio to realize the $1 billion gain used to offset the CIO trading loss. Based on Reuters estimates the balance of the profitable trades remaining in the portfolio is $272 billion and the remaining unrealized gains available to cover additional losses are $7.4 billion...As a result of the sale, at least 12% of the total investment account reserves that were, in theory, set aside to protect depositors in the event of a market shock, have been raided to prop up the second quarter bottom line. But that assumes you buy the Dimon’s “excess deposits” party line. As Amar Bhide pointed out, much of these funds are actually hot international money, not the cash reserves of retail investors and ordinary businesses. So no matter how you look at this, it isn’t pretty. Either you have JPM raiding deposit reserves to preserve trader and executive pay, or you have Dimon misleading investors and regulators in depicting a profit-driven, risk-seeking trading unit engaged in “hedging” on behalf of “depositors.”, MORE

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By Michael Crimmins, who has worked on risk management and Sarbanes Oxley compliance for major banks