If JPMorgan Chase's (JPM) trading blowup raised worries about booby traps at other financial giants, it might be comforting to know that its securities portfolio is more complex — and perhaps trickier to hedge — than those of rival megabanks.
When they're not lending, banks typically subsist on a diet heavy in government-backed mortgage bonds: debt issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae accounted for more than half of bank securities portfolios at yearend, according to data from the Federal Deposit Insurance Corp.
Most of the biggest banks fit the profile. Such instruments increased 20 percentage points from the end of 2007 to 82% of U.S. Bancorp's (USB) $74 billion securities book as of the first quarter, for instance. Meanwhile, U.S. Bancorp reduced its holdings of mortgage bonds without federal guarantees by 8 percentage points, to 2% of the portfolio.
Similarly, Bank of America (BAC) has maneuvered away from the private-label mortgage bonds that built up on its balance sheet during the housing bubble. Agency debt now makes up about 76% of its holdings. Treasuries make up another 11%.
(The data here does not include trading books, where banks take positions to try to profit from short-term price movements. Such assets totaled $716 billion across the industry at yearend, compared with $2.9 trillion of securities in different buckets.)
JPMorgan Chase, however, has moved in the opposite direction, piling into private-label mortgage bonds and foreign securities as agency debt fell by 49 percentage points from the end of 2007 to 29% of its $379 billion securities portfolio as of the first quarter.
Most of the firm's securities are housed in its Chief Investment Office, the site of a disastrous derivatives strategy that CEO Jamie Dimon said this month was designed to hedge against credit losses but "morphed" into something else.
Dimon said the play, which stands to create billions of dollars of losses, was tied to the company's "overall credit exposure." It would be a leap to infer that it was a natural corollary to JPMorgan Chase's unorthodox securities mix.
Still, credit risk is generally not an issue with debt backed by the United States, and Dimon said the makeup of the securities portfolio allowed his company to invest at higher rates while keeping maturities short and defending against the "fat tail" risk of a spike in interest rates.
To be clear: There are divergences in other banks' investment strategies.
While Citigroup (NYSE: C) has replaced private-label mortgage bonds with agency debt, foreign securities continue to occupy an unusually large position on its books, for example.
Moreover, all banks face the challenge of searching for yield while keeping duration profiles trim amid soft loan demand.
If JPMorgan Chase can slip up — particularly during a period of relative market tranquility — anyone can.
But it likely won't be in the same way.