Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1349.3 | -8.3 | -0.61% |
| Eurostoxx Index | 2231.1 | -16.3 | -0.72% |
| Oil (WTI) | 96.03 | -1.0 | -1.08% |
| LIBOR | 0.467 | 0.000 | 0.00% |
| US Dollar Index (DXY) | 80.19 | 0.078 | 0.10% |
| 10 Year Govt Bond Yield | 1.85% | -0.02% | |
| RPX Composite Real Estate Index | 175.3 | -0.1 |
Markets are lower this morning after J.P. Morgan announced a $2 billion trading loss in its Chief Investment Office unit. April PPI showed inflation is behaving at the wholesale level. Bonds and MBS are higher.
The JP Morgan story is interesting. The position was supposed to be a hedge the bank’s credit exposure. However, if you read the Blooomberg story, it suggests the bank had sold protection on the Markit Series 9 CDX North American investment grade index. Which means it wasn’t hedging anything at all – selling protection and extending credit (which is what the bank does) are similar risks. The story goes on to speculate that it may have been some sort of spread bet, where the bank was short long-dated protection and long short-dated protection. Regardless, this position in no way hedges the bank’s overall business, at least as far as I can tell. Good luck getting out, guys. J.P. Morgan is going to get their eyes ripped out on the exit.
This incident will not cause a systemic risk in any way – if anything it will simply give ammo to the proponents of the Volcker Rule. A $2 billion loss for a bank that made $19 billion the year before and has $176 billion in equity is not fatal in any way. It also shows (again) the fundamental weakness in Value at Risk (VaR), which basically tells you the best case scenario when the fit hits the shan. JP Morgan stock is down 9.2% this morning.
The CFPB has proposed rules for mortgage origination costs, which bans origination charges that vary by the size of the loan. Rob Christman summed it up perfectly: “I’m sure that consumer groups are happy about it – just wait until they can’t find anyone who’s going to do a $100,000 loan.” The CFPB has also re-affirmed the anti-steering rules by the Fed.
The Facebook IPO is supposedly garnering lukewarm interest, at least at the price being discussed. It must be bad – I heard Mark Zuckerberg was seen this morning in a suit and tie, eschewing his traditional hoodie. The underwriters still have time to whip up excitement for the deal which should list on May 17 under they symbol FB.
Filed under: Morning Report |
All Things in Moderation 
Brent:
Good luck getting out, guys. J.P. Morgan is going to get their eyes ripped out on the exit.
Very true. I pointed out on the previous thread that the very fact of disclosure was likely to increase their losses.
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Brent, would it be OK with you if I go into the archives and add “Monday”, “Tuesday” etc. to the titles of your Morning Reports? It gets confusing in the “Moderately Recent Comments” bar on the right when we’ve got folks commenting on multiple Morning Reports.
And I still don’t always understand why markets do what they do, but I feel a lot more informed about things after reading your summaries for a few months now–thanks!
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Should have been quote of the day:
“Just because we’re stupid doesn’t mean everybody else was,” Dimon added
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jnc:
Should have been quote of the day:
Damn. You are right.
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Carrying over from yesterday:
“ScottC, on May 10, 2012 at 8:18 pm said:
jnc:
Would it have been theoretically possible if the positions and losses were large enough for this to have triggered an FDIC/Federal Reserve/taxpayer backstop?
Of course. The only possible way to remove those possibilities, regardless of what a bank does, is to not offer them in the first place.”
“ScottC, on May 11, 2012 at 5:41 am said:
To me the real issue isn’t the types of risk they had, or the products they used to manage that risk, but rather the metrics and reporting they had in place to measure and know the risks they actually had.”
To me the real issue is that as a taxpayer I shouldn’t be subsidizing, directly or indirectly JP Morgan Chase’s London trading desk.
If trades like this have the potential to wipe out the firm (ala Barings), then there should be no taxpayer backstop period.
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jnc:
To me the real issue is that as a taxpayer I shouldn’t be subsidizing, directly or indirectly JP Morgan Chase’s London trading desk.
Should you be subsidizing Chase’s lending activity in China?
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@Michigoose, sure no problem. I’m glad you like the material.
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Sort of unsurprising that Facebook is not generating excitement. Valuation is set too high — it’s not the ’90s anymore. Though I guess there are plenty of suckers out there to make up for the lack of institutional appeal.
Thanks to Brent, jnc, and Scott for breaking down the JPM story.
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I don’t know if any of these links will be useful to anyone here, and I don’t feel qualified to get into a big debate with a bunch of financial guys, so I’m only linking them in case there’s some interest.
Is it time to kill VaR?
It looks like Moody’s is set to downgrade some of the bank’s ratings sometime next month.
Simon Johnson on a little more movement across party lines to break up the four big banks.
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WSJ reporting the BlueMountain and BlueCrest were on the other side of the JPM trade..http://stream.wsj.com/story/markets/SS-2-5/SS-2-15923/?mod=wsj_streaming_markets
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Brent:
WSJ reporting the BlueMountain and BlueCrest were on the other side of the JPM trade.
Anecdotally I have heard that virtually everyone was on the other side.
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“ScottC, on May 11, 2012 at 8:13 am said: Edit Comment
jnc:
To me the real issue is that as a taxpayer I shouldn’t be subsidizing, directly or indirectly JP Morgan Chase’s London trading desk.
Should you be subsidizing Chase’s lending activity in China?”
Nope.
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jnc:
Nope.
Exactly. So the problem from your perspective, it seems to me, is not what banks are allowed to do, but what the fed/gov’t does. I don’t think it makes sense to single out trading activity when your real objection (and a reasonable one at that, I think) is in principle to very notion of a subsidy/guarantee under any circumstances.
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The problem with getting rid of VaR is that there is really nothing to replace it. Stress tests are highly subjective.
What VaR tells you is “If we have a 1 in 20 conflagration, we will lose AT LEAST $x”
Not “If we have a 1 in 20 conflagration, we will lose $x” or “we will lose at most $x”
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” If trades like this have the potential to wipe out the firm (ala Barings), then there should be no taxpayer backstop period.”
Exactly. JPM should be allowed to make stupid trades as long as the rest of us aren’t subject to collateral damage. Simon Johnson noted that one shocking aspect of this loss is that it occurred in a relatively mild period of the credit cycle. What happens if/when more banks take advantage of this loophole & it goes sour?
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bsimon:
Exactly. JPM should be allowed to make stupid trades as long as the rest of us aren’t subject to collateral damage.
Again, the only way “the rest of us” won’t be subject to the collateral damage of stupid things JPM decides to do is to close the discount window and any implied government support for FDIC. Otherwise, no matter how much JPM is regulated and what it is allowed to do, “the rest of us” will be on the hook for stupid trades done.
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I know we have some Jonah Goldberg fans around here, so they may be interested in Alex Pareene’s synopsis of his career. While there are a lot of good bon mots, this one is representative:
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” would it be OK with you if I go into the archives and add “Monday”, “Tuesday” etc. to the titles of your Morning Reports? It gets confusing”
How about the date?
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@yellojkt,
My first impression was “Who’s Alex Pareene?”
My other impression is that an ideology can stand just about anything except for ridicule.
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Alex Pareene is a blogger who cut his teeth at Gawker and Wonkette so his wit is razor sharp and well on the snarky side.
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“ScottC, on May 11, 2012 at 9:03 am said:
jnc:
Nope.
Exactly. So the problem from your perspective, it seems to me, is not what banks are allowed to do, but what the fed/gov’t does. I don’t think it makes sense to single out trading activity when your real objection (and a reasonable one at that, I think) is in principle to very notion of a subsidy/guarantee under any circumstances.”
That’s correct, my issue is with the entire government bailing them out. However, if you are going to maintain the FDIC (and I don’t think it’s going away anytime soon), then there has to be a way to segregate the regulated and subsidized (because the FDIC backstop is a risk subsidy) part from the risk taking and more profitable part so that the risk taking part can incur losses and potentially wipe out all shareholders and bond holders. The various popular proposals for this are the Volker rule and a return to Glass-Steagall.
How would you recommend restructuring the government backstops so that there are no more bailouts/subsidies for the financial sector?
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jnc:
I have to run…I have a 3 hour “continuing education” test that has literally nothing to do with the business I am in but is required by the government if I want to be allowed to work. Will respond later this afternoon/early evening.
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jnc:
I owe you an answer from earlier.
How would you recommend restructuring the government backstops so that there are no more bailouts/subsidies for the financial sector?
Again, strictly speaking, the only conceivable way to eliminate all possibility of bailouts/subsidies of the financial sector is to eliminate access to the Fed discount window and eliminate the government guarantee of FDIC. But I suspect your real question is how to limit the risk of such bailouts/subsidies to that which derives from certain, “preferred” activities and eliminate that which derives from other, disfavored activities.
My first reaction to this question is to wonder how to determine which activities deserve to fall into the preferred column and which into the disfavored. I don’t think I accept the distinction you’ve drawn between those activities that are “regulated and subsidized” and those that are “risk taking”. All banking activity is regulated and all banking activity is an exercise in risk taking. That is what banks do and how they make money, both for shareholders and depositors: they analyze, take on, and manage financial risk. As for what is subsidized, I’m not sure that is quite the right word, but it applies to whatever activities the bank engages in with its deposits.
So, again, which activities should be favored and which disfavored? Is speculating on the prospects of success for a small business owner, or the credit worthiness of a prospective homeowner (and, by implication, the future value of the real estate market) or the future value of US government bonds – all of which would be allowed under Volcker as proposed – preferable for some reason to other activities like speculating on the future value of Japanese government bonds or buying naked protection on the value of the real estate market via a synthetic CDO or speculating on the creditworthiness of a large US corporation by selling a CDS on that corp – all of which would likely be disallowed under Volcker as proposed? If so it is not clear to me why. One might argue that the former activities are less likely to lead to a taxpayer loss on FDIC or Fed lending or a bailout, but I’m not sure that the evidence of our most recent financial troubles would support that argument. For the most part it was relatively small banks engaged in the allegedly safe and conservative activities and non-bank entities not even covered by FDIC (eg AIG) that have failed to pay back their TARP bailout money and/or accessed FDIC insurance, not the big banks with trading operations.
But all that aside, with regard to FDIC insurance, it could be structured so that the cost of purchasing insurance (banks do pay for it, afterall, it is not a free guarantee) is related to the types of risk activities engaged in by the bank, and how favored/disfavored those activities are. I am not an expert on how FDIC premiums work, but currently there is some measure of risk assessment that goes into determining premiums. That risk assessment could be made more robust to include types of activities engaged in and used to cover the perceived additional risks created by the disfavored activities.
With regard to the Fed discount window, I don’t think it is fair to call that a subsidy or a bailout. Money borrowed at the discount window is not free. It is required to be collateralized, an above market interest rate is paid, and unless I am mistaken the Fed has never lost taxpayer money lending via the discount window. The discount window acts simply as a short term lender of last resort in order to provide liquidity during illiquid times. It does not act as the savior to any bank about to go into bankruptcy.
With regard to TARP-like bailouts, given that those are political decisions made at the whim of elected representatives, I don’t think there is anything to structure that would make it objectively impossible or even less likely that such bailouts would ever be used for institutions engaged in disfavored activities. Politicians are going to do what they want to do for whatever reasons they may have. If companies that make cars can get bailed out, so can companies that speculate on the direction of the price of oil, if that is what politicians decide they want to do.
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“government if I want to be allowed to work”
there’s a thread idea — occupational licensing laws. protecting the public, or protecting established businesses?
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“novahockey, on May 11, 2012 at 9:43 am said:
“government if I want to be allowed to work”
there’s a thread idea — occupational licensing laws. protecting the public, or protecting established businesses?”
Potentially some of both.
Edit: I tend to be more in favor of licensing laws that involve some sort of public health/communicable disease application. I.e. Health inspections for restaurants and even the much derided beauticians licenses.
Of course on the opposite side are things like taxi cab medallions which exist for the sole purposes of creating a monopoly.
My rule of thumb is that a licensing requirement is legitimate provided it’s not intentionally structured to limit the number of businesses that can comply. I.e. anyone can be a beautician provided that they comply with health requirements such as the proper use of Barbicide.
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jnc/nova:
A starting point for your thread about occupational licensing?
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from mike’s link: ” For instance, cosmologists on average require 372 days of training, while EMTs only require 33.”
i think jnc is spot on. Here in DC there’s a fight brewing over the taxis. basically a lot of people – local columnists anyway – don’t like the fact there is no uniform standard for cabs — like London or NY. as long as it’s safe, i don’t care what kind of car it is.
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Florida is one of those states that requires licensure for interior designers. The Institute for Justice just lost a federal lawsuit last year in the 11th Circuit challenging the interior design licensing requirement. Seriously, 6 years of training before you can get your license and call yourself an “interior designer.”
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as long as it’s safe, i don’t care what kind of car it is.
You are clearly unfamiliar with DC cabs. ‘Safe’ is the last word I would use to describe most of them.
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Interior design, which is a sub-specialty of architecture, is often confused with interior decorating, which is picking out furniture and curtain swatches. While I have had many run-ins with interior designers, they deserve at least as much respect as landscape architects, who also have to be licensed.
As a professional engineer I get very nervous when clients start brainstorming ideas that defy known laws of physics and them get mad at me for being a stick-in-the-mud unimaginative engineer.
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“lmsinca, on May 11, 2012 at 8:16 am said:
I don’t know if any of these links will be useful to anyone here, and I don’t feel qualified to get into a big debate with a bunch of financial guys, so I’m only linking them in case there’s some interest.
Is it time to kill VaR? ”
Thanks for this, as I was unfamiliar with the history of the “value at risk” model.
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” a stick-in-the-mud unimaginative engineer.”
Is that a credentialing requirement for engineers?
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Worth noting about DC Cabs:
“D.C. taxi official turned FBI informant recalls role in corruption probe”
http://www.washingtonpost.com/local/crime/dc-taxi-official-turned-fbi-informant-recalls-role-in-corruption-probe/2012/04/02/gIQAErYhrS_story.html
“D.C. taxi industry insiders sentenced in bribery scheme
By Del Quentin Wilber, Published: February 10”
http://www.washingtonpost.com/local/crime/dc-taxi-industry-insiders-sentenced-in-bribery-scheme/2012/02/10/gIQApuH04Q_story.html
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“bsimon1970, on May 11, 2012 at 11:26 am said:
” a stick-in-the-mud unimaginative engineer.”
Is that a credentialing requirement for engineers?”
I’d love to see this phrase:
”a stick-in-the-mud unimaginative banker.”
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Is that a credentialing requirement for engineers?
Yes it is. You have to be a stick in the mud for four years after college and then pass an eight hour test in unimaginitiveness.
I have a 3 hour “continuing education” test that has literally nothing to do with the business I am in but is required by the government if I want to be allowed to work.
I feel your pain. Continuing education is neither.
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” A starting point for your thread about occupational licensing?”
Interesting, thanks. It makes me wonder if licensing creates a false sense of security for consumers.
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I tend to avoid the cabs here in DC just b/c of traffic. I also liked the zone system more than the meters. but i knew where the lines were drawn so i could get a 1 zone fare.
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In lousiana, florists need to be licensed.
http://www.usatoday.com/news/nation/2010-03-10-florists_N.htm
Because every rose has it’s thorns.
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yeah it does
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I’m embarrassed to admit I like that song.
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1. there’s no shame in liking that song.
2. i saw Poison, along with Ratt and a couple of other hairbands about 8 years ago at some sort of summer festival. the people watching was fantastic. equal part redneck and hipster. highlight of the evening — girl bums a cigarette, declines the lighter, and strikes a match on her, ah, huge tracks of land. I was equally shocked and impressed. what a country.
3. Warrant played a frat party at a neighboring school. we thought it was a cover band. upon further inspection, it was actually Warrant.
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Wow! I was at the 83 US festival on Heavy Metal day.
http://en.m.wikipedia.org/wiki/US_Festival#section_3
That was a long time ago, in a galaxy far, far away.
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I still think Cinderella was the best of the 80’s hair bands.
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If GnR is considered a hairband, then i go with them. Otherwise, I go with Dokken.
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” I’m embarrassed to admit I like that song.”
Ugh. Now you guys have gotten it stuck in my head..
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Quiet Riot would be best “hair metal” though I’d vote for GnR above them if they’re considered a “hair metal” band.
Can we get a ruling here?
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I vote no. GnR is not glam metal, aka hair band.
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but quiet riot was at that concert i went to.
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Gnr, no. Def leppard, yes & in running for top hair band.
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