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The fallout from the $2 billion trading loss at JPMorgan--the result of a "hedge" that sure seems like a prop bet--is only just now beginning. JPMorgan CEO Jamie Dimon is "set to accept the resignation of Ina R. Drew," reports the New York Times. "Ms. Drew, a 55-year-old banker who has worked at the company for three decades and serves as chief investment officer, had repeatedly offered to resign since the scale of the loss became apparent in late April, but Mr. Dimon had held off until now on accepting it." Her untimely demise at the bank marks "a stunning fall from grace for one of the most powerful women on Wall Street, as well as a trusted lieutenant of Mr. Dimon. Last year, Ms. Drew earned roughly $14 million, making her the bank's fourth-highest highest paid officer." Two traders who worked for Drew reportedly will also resign. Within the bank, people seem to be striking a sympathetic note. Up until now, Drew had been on a fast upward trajectory.. There will be more fallout to come. Speculation has mounted that Bruno Iksil, the London trader also known as Voldemort and The Whale might also be feeling some pressure. Others may be suffering similarly, but even if executives step down, the ordeal will not magically be over. Investigations will proceed at several levels, and we just may see the key executives called to testify publically before Congress. Testifying will be difficult, and they will likely be advised to plead the fifth, which will make them look bad in the eyes of the public. This unfortunately is a long way from being over for the implicated executives. For more: Related articles: Read more about: proprietary trading, JPMorgan Chase
2. The humbling of Jamie Dimon
Was Jamie Dimon getting too big for his britches? Will his fall from grace be as painful as his ascent to power and influence was satisfying? We'll just have to see how the $2 billion trading loss plays out for JPMorgan CEO Jamie Dimon. But no matter what, he will have to emerge a changed CEO, perhaps less brash, less willing to lead with his chin--a classic imperial CEO forced to humble himself. A New York Times columnist notes that the trading debacle came after he publically called two important regulators--Paul Volcker and Richard Fisher, president of the Federal Reserve Bank of Dallas -- "infantile" and "nonfactual." In the audience, some "were taken aback by the comments." In one sense, this was classic Dimon, whose penchant for remaining true to his personality is seen as refreshing by some. At the same time, his recent moralizing on regulation may have to be moderated given his now attenuated stature as an executive and industry spokesman. The greatest critic of Dodd-Frank could well become its poster child. Already, Elizabeth Warren, the mother of the Consumer Financial Protection Bureau and candidate for Senate, has called for him to step down as a board member of the New York Federal Reserve. No one thinks his job as CEO of the bank is in jeopardy, but that doesn't mean he'll be immune from withering criticism. The Teflon has started to melt just a little. For more: Related articles: Read more about: Jamie Dimon, JPMorgan Chase 3. Assessing demand for Facebook shares
It's been noted that Facebook faces a bit of skepticism about its near-term growth prospects. To support a Google-like price rise, the growth rate curve should increase at an increasing rate. Increasing at a decreasing rate will likely not be enough. That in a nutshell is what investors are worrying about when it comes to the most high profile IPO since Google. High demand, especially at retail had been expected. And one report from Reuters holds that demand has been strong and that the deal is already oversubscribed. Indeed, the underwriters might close the order books early. Yet we have not seen the company raise the upper bound of the expected price range, something we had expected to happen by now. I f the price range is adjusted upward, I'll take that as confirmation of the Reuters report. However, if the price range is not changed, perhaps Bloomberg is deeper in the money with its report noting that demand has in fact been lackluster. "Some investors expressed reluctance after Facebook said on May 9 that advertising growth hasn't kept pace with the increase in users, said the people, who asked not to be identified because the process is private. Facebook is also telling analysts that sales may not meet their most optimistic projections." One buy-side executive was quoted saying, "It's overvalued at that price. Investors are becoming more selective and there are quite a few fallen angels around, like Netflix. Those who buy Facebook at these levels are more speculators than investors." Demand remains robust from retail investors.I can only hope they don't get suckered. For more: Related articles: Read more about: IPOs, Facebook 4. Sell-side sticks with JPMorgan Chase
In the wake of the $2 billion trading fiasco at JPMorgan, sell-side analysts seem to be sticking with the company. "Out of more than 15 sell-side analysts opining on the company's unexpected $2 billion trading loss, less than 24 hours after the shock announcement, only two have downgraded the stock. Stifel Nicolaus lowered its recommendation to hold from buy, and FBR Capital Markets cut the stock to market perform from outperform because of the credit-derivative risks on the bank's books," notes Deal Journal. It quoted Stifel analyst Christopher Mutascio as saying that, "It will take investors a significant amount of time to regain a comfort level with the company's risk management of its large derivatives book." J.P. Morgan is "somewhat unanalyzeable, in our view. How does one go about assessing the risk contained within the company's significant derivatives book when we have no meaningful access to anything to analyze?" So why aren't other sell-side analysts rushing to the same conclusion? The reason may have to do with the reputation of Jamie Dimon. The CEO has taken some huge hits to his credibility, but not enough to cause grave concern. One expert said that, "There are certain firms and certain individuals that get a do-over in this business. You can call it the 'Dimon factor,' but people are more likely to give him the benefit of the doubt here, for any mistake." I largely buy this explanation, but it's fair to say you only get so many do-overs. For more: Related articles: Read more about: proprietary trading, Hedging Risk 5. What exactly was JPMorgan hedging?
Was it really a hedge? Or was it a prop bet disguised as a hedge? You can be forgiven if you are wondering if it was the latter. At the JPMorgan conference call, analysts put the question fairly directly to CEO Jamie Dimon. As DealBreaker puts it, analysts basically asked "why did you feel the need to add synthetic credit exposure? Others asked a not-unrelated question, which was, roughly, 'c'mon Jamie, was this guy actually 'hedging' or was this just a crazy prop bet?' Dimon's answers 'were not super satisfying but they were clear enough: the Whale was hedging, not adding, credit exposure.'" Somehow, the the bank ended up long, which most people would take to mean that the bank had a huge short position somewhere, some how. But that may not be the case either, as it's not exactly clear what was being hedged. One theory is that the bank was hedging against inflation, which dovetails with the bank's use of the term economic hedge and frankly sounds more like a prop bet on a hard eight, er, on whether inflation would spike. It's hard to really say much because the issue remains so clouded. When we think of a hedge we, perhaps simplistically, think of buying a security. If you want to hedge against a stock dropping, you would buy puts, but hedging is much more complex these days. Still, if a bank takes on massive amounts of variable payout risk--if it were a put seller, for example, or, net seller of index CDSs--then it really does seem like gambling, no matter what. For more: Read more about: hedging, Hedging Risk Also Noted
SPOTLIGHT ON... Internal fallout at JPMorgan Chase Within JPMorgan Chase, the massive $2 billion trading loss has sparked plenty of dismay. "Investment bankers at J.P. Morgan are particularly unhappy about last week's disclosure, partly because some clients might mistakenly think the losses occurred in the investment-banking unit, people familiar with the matter said. J.P. Morgan's investment-banking operations and Chief Investment Office operate separately," notes the WSJ. Other banks are upset that they are being relied upon to fix the trading mess. Article Company News: Industry News: Regulatory News: And Finally…How not to buy Facebook. Article
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Tuesday, May 15, 2012
| 05.15.12 | Top JPMorgan exec resigns
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