Receiving Wide Coverage ...
The JPM-a-Thon Goes On: Fans of slow-motion car wrecks will take a certain pleasure in the sting of nasty news that seems to be pulling JPMorgan Chase (JPM) inexorably closer to calamity — political, if not economic. It turns out the same London Chief Investment Office that wracked up the $2 billion loss so much in the news is, separately, sitting on $100 billion (yes, billion with a "B") of risky bonds, reports the Financial Times. The funny-coloured paper says the holdings are part of a deliberate 2009 move that JPM's CIO made out of safer assets, such as U.S. Treasuries, to increase returns and diversify investments. The bank's CIO has been "the biggest buyer of European mortgage-backed bonds and other complex debt securities, such as collateralised loan obligations in all markets for three years." That's according to "more than a dozen senior traders and credit experts" cited by the FT. "I can't see how they could unwind these positions because no one can replace them in terms of size," a trader is quoted as saying. "It's a bit of the same problem they face with the derivatives trade. They pretty much are the market." Translation: good luck getting out of these babies. Adding to the sense of disarray and mismanagement, JPM didn't have a treasurer in place during a five-month period when its CIO placed trades that led to the more than $2 billion in losses, according to the Wall Street Journal. Normally, the treasurer would play a critical role in managing the firm's balance sheet, capital, funding and liquidity and working closely with heads of all lines of business, it notes. Worse, at least as far as how it sounds, the executive put in charge of risk management for the CIO in February had little experience and is the brother-in-law of another top bank executive, the Journal reports. If all that weren't enough for one day, there's that item at the top of the Journal's front page with the inside-JPM tick-tock account of events leading up to its $2 billion bombshell. The tale is replete with Jamie Dimon "barking" and tossing documents (Quick: Who's going to play Jamie in the movie?), as well as internal debates about what to make public and when. Where Wall Street blunders occur, of course, politicians are sure to follow. The Senate Banking Committee said Thursday that it will ask Dimon to testify as early as next month. That same committee is separately holding a round of Dodd-Frank hearings involving JPM's regulators, including the Federal Reserve, Office of the Comptroller of the Currency and Securities and Exchange Commission. Separately, Senator Carl Levin of Michigan and Senator Jeff Merkley, Democrats who authored the Volcker Rule, used a Thursday call with reporters urge fellow lawmakers to close the "JP Morgan Loophole" that presumably permitted its ill-fated trades. The news of Dimon's upcoming testimony follows press reports (from anonymous sources, of course) that the U.S. Justice Department and several regulators have already opened probes. JPM's losses, meanwhile, have continued to build by as much as $150 million a day since last week's announcement and could eventually total more than $5 billion, according to the Journal. If J.P. Morgan could mess up, what about Citigroup (NYSE:C) , Bank of America (BAC), Morgan Stanley (MS) or Goldman Sachs (GS)? asks the Journal's Heard column. Somewhere out there, the hedge fund masters on the other side of the JPM's trades are undoubtedly sizing up bigger yachts.
Greek Roulette: Europeans are guilty of "foot-dragging and brinkmanship" in grappling with their financial crisis over the past few years — and that's a good thing in that it's bought the world time to prepare for what looks increasingly likely to be a Greek departure from the Euro Zone. So says the New York Times in reporting that the stall tactics have averted a "Lehman moment" and have "won the other members of the currency union valuable time to prepare for life without Greece. Banks have recorded losses on Greek investments, companies are making contingency plans and Europe has bolstered rescue funds for other vulnerable nations like Portugal, Ireland and Spain." That's good news, given the political mess in Athens. In a fresh bout of brinksmanship, Alexis Tsipras, head of Greece's Coalition of the Radical Left, warns that in the unlikely event that Europe shuts off the euro spigot to his nation, it will simply stop paying its debts, reports the Wall Street Journal. "If … they cut off our funding, then we will be forced to stop paying our creditors," said the 37 year-old political leader of a party that recent polls indicate is likely to win the most votes in Greek elections next month. Tsipras seems to be angling more for an easing up on austerity measures imposed by Brussels than an outright Greek departure from the Euro Zone. The uncertainty is still having knock-off effects elsewhere. It helped yesterday to send the euro to its lowest level against the dollar since mid-January. Fitch warned that it might place all Euro Zone sovereign ratings on negative watch following a re-run of Greece's parliamentary election in June. In similarly troubled Spain, the government called for investor calm on Thursday as shares in Bankia, its second-largest bank by domestic deposits, fell nearly 30%. Moody's, meanwhile, conducted a sweeping downgrade of other Spanish lenders, reports the Financial Times. "It's not true that there's a deposit flight," Deputy Finance Minister Fernando Jiménez Latorre told a news conference called to discuss the country's economic outlook. When senior officials begin denying that a run on the banks is underway, it's time to batten down the hatches.
Force of Nature: New York Department of Financial Services Superintendent Benjamin Lawsky on Thursday blasted banks for overcharging consumers for homeowner policies and earning fat profits "for what appears to be very little work." The comments came during the opening of three days of hearings into happenings inside the market for force-placed insurance. Homeowners with mortgages are generally required to carry homeowner policies to protect their property, which serves as collateral for mortgage loans. Banks can "force" these policies on customers who allow their insurance to lapse by mistake, or because they have stopped paying on their mortgages and escrow funds have run short to cover the premiums. Regulators began looking into the force-placed market over the past year or two following a series of stories by American Banker indicating that premiums may be excessive and pay-to-play kickbacks from insurers to referring banks rampant. Lawsky's office has issued subpoenas and formal document requests to banks and insurers in recent months, demanding answers on how premiums for the policies are calculated. He said his initial inquiry shows that while 63 cents of every dollar in premiums goes to pay a claim on a typical homeowner policy, the specialty companies that work with the banks often pay less than 25 cents of each premium dollar for a claim, the Wall Street Journal reports. "The percent of premiums actually spent to cover claims seem extraordinarily low," Bloomberg quoted him as saying.
The world's 29 largest global banks have a simple choice: Raise $566 billion in new capital or shed about $5.5 trillion in assets by 2018 to meet the new tougher Basel III bank capital standards. So says a new study by Fitch Ratings quoted in the FT. The additional capital would represent a 23% increase in what the banks had at the end of 2011 and is roughly equivalent to three times their combined annual earnings, according to the report published on Thursday. Fitch's calculations for Global Systemically Important Financial Institutions — Gsifi banks for short — suggest the banks face a bigger hole than predicted by earlier studies, including one published in April by the Bank for International Settlements that suggested 103 large banks, including the GSifis, needed to raise €486 billion, or roughly 1.4 times earnings. If the big banks were to plug their capital hole entirely with equity, it would cut returns on equity to 8.5% from an average of 10.8% over the past seven years.