Today's Top Stories Editor's Corner: What the JPMorgan fiasco means for the Volcker Rule Also Noted: OpenText News From the Fierce Network:
Today's Top News1. Dimon to testify in Washington
JPMorgan CEO Jamie Dimon was thought to be an executive of extreme influence in Washington. He emerged from the financial crisis as something of a go-to guy, and industry leader willing to engage top officials on the tough issues. The insider ties he cultivated since the financial crisis will soon be tested, as he comes under mounting pressure in Washington over JPMorgan's $2 billion trading fiasco that has jolted the entire industry. I've suggested that the Teflon has been wearing just a bit, and we'll soon get an indication of just how much. It's telling perhaps that Treasury Secretary Timothy Geithner has called publically for Dimon to step down from the board of the Federal Reserve Bank of New York, which ostensibly is one of the bank's regulators. He joins the likes of Elizabeth Warren, Eliot Spitzer and others. In addition, the Senate banking committee will soon call Dimon to testify, and he really has no choice but to accept the offer. As of now, the committee has not set a date for the hearing, but that is expected soon. It will be quite a media event. On top of all this, the Justice Department and the SEC have opened investigations into how all this could've happened. My sense is that the best thing the bank board can do at this time is to let it be known that it is seriously considering clawbacks, from the responsible executives and from the CEO as well. That would dampen the public outrage and position Dimon as an accountable executive. He can afford it, after raking in $23 million for his work in 2011. For more: Related articles:
Read more about: Jamie Dimon, JPMorgan Chase
2. How big will JPMorgan's losses be?
The conventional wisdom seems to be that JPMorgan's losses, which were originally estimated by the company at $2 billion, have grown in recent days as the market continues to move to the detriment of the bank's open CDS positions. The assumption is that the losses have grown to about $3 billion on paper. So how much will the bank ultimately lose? Oppenheimer & Co has estimated an upper bound of sorts. It used the average of the Markit CDX NA IG Series 9 index in 2011 "to estimate on a straight line basis a theoretical additional loss for the bank of $5.9 billion. Oppenheimer analysts, however, cautioned that such a large loss was unlikely." They say the bank has likely set up some hedges--I can only hope they got the maturity dates lined up, etc.--and the estimate doesn't account for market moves driven by trading. I think the latter is important. While the market has moved against JPMorgan in the short term, it may reverse course. The market has been driven to a degree by the market dynamics of hedge funds sensing blood and trading against JPMorgan Chase. That dynamic may play itself out fairly soon if the market continues to perceive improvement in the credit quality of the big companies in the index. That would move the market back in JPMorgan's favor. So the net loss may be closer to $2 billion. In any case, it would be nice if the bank were to spell out its positions in more detail. For more: Related articles: Read more about: proprietary trading, JPMorgan Chase 3. Facebook's IPO in perspective
If you were in or around the technology industry in the mid-1990s, you remember well what an electrifying moment the Netscape IPO was. The company was cast as the antidote to an evil empire, which at the time was Microsoft, and the shares fared well early on. At the time, a company just 16 months old going public was unheard of. Truly, the company was special -- or so we thought. If you were in or around the technology industry in the mid-2000s, you remember well just how momentous the Google IPO was. The company was also cast as the antidote to an evil empire, which was again Microsoft, and its shares fared well early on as well. In the end, Netscape was vanquished, while Google prospered. Facebook seems to be sort of in-between. I hope it will resemble Google more than the short-lived Netscape in terms of longevity. Facebook might be seen as having a more mature business model early on, and that might serve to limit its upside. Of course, Google was able to make its advertising model pay handsomely, while it remains unclear if Facebook can do so with as much success. There are plenty of skeptics. "It is the eternal question with start-ups. Facebook seems in some ways as tenuous as Netscape, in others as sturdy as Google. With a valuation that should clear $100 billion, there is a lot of room for error," notes the New York Times. It's now the 23rd largest company by market capitalization. For more: Related articles: Read more about: IPO, Facebook 4. Calls for Dimon resignation from NY Fed bank board
As the controversy over the multi-billion dollar JPMorgan trading debacle drones on, criticism of CEO Jamie Dimon has stepped up. Here's what Eliot Spitzer has to say: Dimon "has tried so hard in the past several years to seem the 'good banker.' He is so charming and gracious, yet all the while lobbying, cajoling, pushing, and wheedling to eviscerate any semblance of real reform on Wall Street. He shrugged off the cataclysm of 2008 as just something that happened, like the weather—no need for any structural reform. Now the chickens have come home to roost—at least 2 billion of them—and it is clear that Chase is like every other big financial institution with distorted incentives." He goes on to ask: "Did Dimon not understand those risks, not care to know about them, or actually mislead the public about them?" Spitzer also voices support for the idea, first floated by Elizabeth Warren, that Dimon should resign his position on the board of the Federal Reserve Bank of New York, which is supposed to oversee his bank. "If Dimon fails to resign from the New York Fed, there should be a public outcry demanding his resignation." Is this a good idea? Yes. But the more strident the calls for him to step down, the more likely it is that he will not. That said, the JPMorgan board is no doubt attuned to the fact that they cannot sit idle. They need to address the issues in a meaningful way, at the risk management level and at the optics level. Perhaps they will come up with a more creative solution. For more: Related articles: Read more about: proprietary trading 5. Bond buyers bet on inflation
This week's auction of $13 billion worth of 10-year TIPS was held up as a litmus test of the bond market's view of inflation. As TIPS were already trading at a negative yield, the big issue was just how much a negative yield the market would demand for this fresh batch of securities. We now have our answer. According to Dow Jones, bond buyers accepted a negative 0.391 percent yield--a record low--reflecting "their willingness to pay a premium to own U.S. government debt, perhaps on the belief that they will be compensated with rising inflation down the line. In fact, this yield is lower than the going market rate at the time of the sale. These securities sold at a -0.046% yield in the January auction, then at -0.089% in the March sale." Demand was strong, as the auction registered a bid-to-cover ratio of 3-1. The most demand seemed to originate with foreign buyers. Demand from domestic buyers was much more tepid. I'm not sure what the overseas buyers know that domestic buyers don't. The immediate threat of inflation may not be extreme, but over a decade, we would expect some gains in the CPI. Most likely, these securities will pan out. I would be shocked if buyers end up receiving less than their principal when all is said and done. For more:
Read more about: bonds, Treasuries Also Noted
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Monday, May 21, 2012
| 05.21.12 | What the JPMorgan fiasco means for the Volcker Rule
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