On Monday, the Office of the Comptroller of the Currency and the Federal Reserve issued “enforcement actions” against JPMorgan, which makes it sound a lot more exciting than it is.
The slaps on the wrist for the “London whale” trades, and failures concerning anti-money laundering procedures, come with no fines and no admission or denial of any wrongdoing. The Fed does, however, reserve the right to take further action and the UK’s Financial Services authority said it’s still looking into it. Read more
Or, “More power to the cupcake police”. (Bear with us)
How is pricing within banks, and in markets more generally, policed? Read more
The full story of why JPMorgan entered into the trades that cost it so much money may never become public. However, thanks to Jamie Dimon’s testimony on Wednesday, we can conjecture a little more about the motivations behind the synthetic credit trades entered into by the bank’s Chief Investment Office.
The story begins with surplus deposits. JPMorgan was perceived as safe thanks to its size and relatively good record during the 2008 crisis, so it attracted significant deposit inflows. Much of this money was lent out, but not all of it was, giving rise to the problem of what to invest it in. With government bonds paying record low rates, the bank decided, understandably, to invest some of the funds in corporate and asset-backed securities. The CIO bought over $380bn of these bonds, a very substantial position. Read more
Reading through a new CreditSights note about the JPMorgan CIO trade fallout and hedge accounting treatment, we came across this historical tidbit (emphasis ours):
Back when CEO Dimon was the head of Bank One, there were episodes in the early 2000s when the company registered hefty gains, and then some [marked-to-market] losses on a CDS book designed to hedge underlying credit risk of the loan portfolio. Read more