FRIDAY, OCTOBER 12, 2012

Fact vs. Fiction

"I'm Dave In Denver and I approve this blog post"

JP Morgan reported its much-anticipated 3rd quarter earnings this morning. Naturally the headline number was boastful and resplendent. I was going to do a full-blown, in-depth analysis showing why JPM's headline numbers were misleading and somewhat fraudulent, but it's a lot of work and I don't get paid to write this blog.

Instead, I did a quick "drive-by" look-see at JPM's 8-K filing. The 8-K is a filing that reports "material" events as required by the SEC. The 8-K will be filed to report quarterly results prior to the more complete 10-Q. Often the Statement of Cash Flows is not included in the 8-K, especially with banks.

At any rate, JPM's earnings growth, despite the grand proclamations issued by the CEO - supported by "smoothed out" GAAP numbers reported for each business segment - were a product primarily of two events: 1) significantly increased fees from mortgage origination and mortgage sale activity and 2) a paper income generating accounting reversal in their "allowance for loan losses."

Let me quickly elaborate. JPM reports $5.7 billion in net income this quarter, vs $4.96 billion in Q2 '12 and $4.3 billion in Q3 2011. Nice growth, right? But of that increase, $600 million of the $1.4 billion increase over Q3 last year is accounted for by its mortgage activity. The bulk of the mortgage activity is refinancings that are either subsidized by taxpayer funded Government programs or by taxpayer supported Federal Reserve interest rate and QE policy. JPM takes a fee on the refinancing, takes a small profit flipping the mortgage into a mortgage investment trust and gets a fee on any servicing rights it retains. You can read about that here: LINK

As for the balance sheet loan loss reserve reversal. This is more of the same game JPM and all of the banks have been playing with GAAP accounting and fraudulent risk assessment for the past 2+ years. For this quarter vs. the last quarter, JPM reduced its loan loss reserve by $967 million dollars. This means close a $1 billion of JPM's $5.7 billion net income this quarter was an accounting maneuver. If you strip this accounting chicanery out, JPM reports a decline in net income this quarter vs. last quarter. If you assume the mortgage activity income is not sustainable, the true quality of JPM's earnings come into serious question. I'd bet my last nickel that this was not mentioned on CNBC, Bloomberg or Fox Biz. This is fictitious income predicated on JPM's CFO being accurate on his risk assessment of all of JPM's loan and trading positions. Given what recently happened in London, I'd bet against this. Here's JPM's latest 8-K in case you get bored this weekend: LINK

In fact, let's look at another truth to see how confident the CFO is in the numbers he's reporting to investors and to the world. Most of you are aware that the Fed is conducting "stress" tests of the big bank balance sheets (all of the banks but it's the big banks that count because that's where bulk of the risk is in the system). The data sent to the Fed is essentially the same data used to compile bank financial statements. Specifically and critically, it's the data used to price and account for assets as reported on the above-linked 8-K. Interestingly - no, shockingly - if you read through this article about the stress test procedure, LINK, the CFO's do not have to sign off on and attest to the accuracy of this data. I nearly fell of my chair when I read about this. Bottom line: the numbers being used to prepare the big bank earnings and financial statements, used by the entire financial world, may or may not be accurate. Given the reluctance of CFO's to sign off on this data, I would bet the data is inaccurate to outright fraudulent. Think about that one...

and.....

http://www.zerohedge.com/news/2012-10-12/jpm-doubles-exposure-european-periphery-one-quarter

JPM Doubles Exposure To European Periphery In One Quarter

Submitted by Tyler Durden on 10/12/2012 08:07 -0400

Bond

Italy

MF Global

None

recovery

The last time a Primary Dealer decided to go all in on the Italian "recovery", MF Global went bankrupt. This time around the bank that apparently can't get enough of Italy (and to a smaller extent Spain) and its glorious taxpayer funded, bailed out future is none other than JPM, which according to its earnings presentation has seen its net exposure to Europe double from $6,3 billion to $11.7 billion, following a surge in Italian trading exposure. Surely this will end very well for the bank that only 5 months ago had to reshuffle every executive in its internal $300 billion hedge fund for massive IG9 CDX losses.

Q3 Net European Exposure driven by a surge in Trading securities in Italy and Spain to a total of $14.4 billion: (source)

Q2 Net European Exposure - Italy and Spain trading exposure was just $10.2 billion: (source)

Keep in mind, the Spanish and Italian sovereign bond market is extremely illiquid and a buyer of $5 billion in bonds in these two countries could alone be responsible for a major portion of the P&L move. Which is preicsely what JPM enjoys doing: finding an illiquid product which it can monopolize (ahem IG9) and then becoming themarket.

Keep a close eye on this product because when the latest European bailout fizzles, JPM will be the one way train leaving Europe and crushing all the piggy backing hedge funds in its wake.

http://www.zerohedge.com/news/2012-10-12/jpm-beats-loan-loss-reserve-release-despite-drop-trading-revenues-and-nim-surge-non-

JPM Beats On Loan Loss Reserve Release Despite Drop In Trading Revenues And NIM, Surge In Non-Performing Loans

Submitted by Tyler Durden on 10/12/2012 07:38 -0400

There is a lot of verbiage in the official JPM Q3 Earnings press releasewhich directs to a bottom line number of $1.40, or $5.7 billion on expectations of $1.24, with revenue of $25.9 billion on expectations of $24.53 billion. The primary reason for the lack of disappointment: no major losses in Corporate from CIO, with corporate generating $221 million in Q3, up from a loss of $(1.777) billion in Q2. And then come the adjustments:

$900 million pretax benefit ($0.14 per share after-tax increase in earnings) from reduced mortgage loan loss reserves in Real Estate Portfolios
$825 million pretax incremental charge-offs ($0.13 per share after-tax decrease in earnings) due to regulatory guidance on certain residential loans in Real Estate Portfolios
$888 million pretax benefit ($0.14 per share after-tax increase in earnings) due to extinguishment gains on redeemed trust preferred capital debt securities in Corporate
$684 million pretax expense ($0.11 per share after-tax decrease in earnings) for additional litigation reserves in Corporate
Then there is a DVA loss of $211 MM in banking. Net-net, after taking into account all one-off adjustments, the Q3EPS was really $1.26. But for all the data fudging, and attempts to make the reported EPS non-comparable to the expected one, following an avalanche of one-time adjustments, the bottom line is this:revenues from trading dropped both sequentially and Q/Q while banking expenses rose, Net Interest Margin dropped to a new record low, even as the firm too a major $967 million loan loss reserve release on its loans to $22.8 billion, even as its total Non-Performing Loans rose by a whopping $1.3 billion to $11.370 billion, the largest quarterly jump in years! Just how JPM can justify such a major contribution to earnings coming from loan losses when NPLs have soared is unclear to anyone with a frontal lobe.

Watch the declining blue number even as the green number (for lack of red ink perhaps?) is now solidly rising,

The JPM bottom line summarized:

Thinking the firm generated any money from actual trading in the quarter? Don't. The Revenue from Trading decling by $489 million from Q2 and by $92 million from a year ago to $6.3 billion, even as expenses increased by over $100 mm both sequentially and Y/Y. The biggest collapse, and this will come as no surprise to anyone, was from a plunge in equity market revenues.

So if trading isn't making money, perhaps at least the core banking service - Net Interest Margin - is? Nope. As the chart below shows, thanks to the Fed's Financial Repression, NIM dropped to a fresh all time low of 2.92%.

Finally, for those curious, net peripheral European exposure was reported at $12 billion.

Full earnings presentation below.

http://www.silverdoctors.com/authorities-building-criminal-cases-over-jpmorgan-cio-loss/

AUTHORITIES BUILDING CRIMINAL CASES OVER JPMORGAN CIO LOSS

OCTOBER 11, 2012 BY THE DOC 10 COMMENTS

Breaking reports indicate the London Whale, JPM’s ‘Achilles Heel’ and two other members of JPM’s CIO team face imminent CRIMINAL CHARGES over JPM’s CIO derivatives debacle. It wouldn’t surprise us if Mr. Dimon himself convinced authorities to bring charges simply to further extricate himself from the implications of the alleged criminal falsification of JPM’s financial statements (which Mr. Dimon would have signed off on).

Federal authorities are using taped phone conversations to build criminal cases related to the multibillion-dollar trading loss at JPMorgan Chase, focusing on calls in which employees openly discussed how to value the troubled bets in a favorable way.

Investigators are looking into the actions of four people who previously worked for the team based in Londonresponsible for the $6 billion loss, according to officials briefed on the case. The Federal Bureau of Investigation could make some arrests in the next several months, said one person who spoke on the condition of anonymity because the inquiry was ongoing.

The phone recordings, which were turned over to authorities by JPMorgan, have helped focus the investigation, the officials said.

The investigation centers around FALSE financial statements submitted to regulators:

Authorities are examining how some traders in the chief investment office influenced market prices as their bets began to sour. Investigators are also looking into whether records were falsified to hide the problems from executives in New York. Based on those records, JPMorgan submitted inaccurate financial statements to regulators, another area of focus for investigators.

While the CEO himself would have signed off on those false financial statements, the investigation is reportedly limited 4 individuals on the CIO team, including the London Whale and JPM’s Achilles Heel themselves:

Attention is centered on four people: Javier Martin-Artajo, a manager who oversaw the trading strategy from the bank’s London offices; Bruno Iksil, the trader known as the London Whale for placing the outsize bet; Achilles Macris, the executive in charge of the international chief investment office; and a low-level trader, Julien Grout, who worked for Mr. Iksil and was responsible for marking the trading book.

The stench is so rotten that even the head of the entire CIO office is being thrown under the bus to keep the scrutiny off of the real big-wigs such as Dimon.

Mr. Presidential cufflinks himself obviously has nothing to worry about:

The scope of the inquiry suggests that the problems were isolated to a handful of executives and traders in an overseas division, and did not reflect a fundamental weakness with the bank’s culture and leadership.

Right…the losses obviously had nothing to do with the senior executives that signed off on the directional positions and strategies as well as financial statements. Funny how emails and phone conversations from the CEO and the CIO team simply must not exist.

http://www.zerohedge.com/news/2012-10-10/jpms-dimon-builds-fiscal-cliff-bunker-cfo-exits-balance-sheet-fortress

JPM's Dimon Builds Fiscal Cliff Bunker As CFO Exits "Balance Sheet Fortress"

Submitted by Tyler Durden on 10/10/2012 21:16 -0400

Jamie "The Europeans have the will, but no way; The US has the way, but no will." Dimon had a very open and wide-ranging discussion with the Council on Foreign Relations today. The conversation ranged from the unfairness of the Bear Stearns' deal (poor chap - all that very limited downside from $2/BSC share, at least initially) to the immediate threat of the pending Fiscal Cliff - and his $100mm-debt-ceiling-preparedness war-room bunker, and America's longer-term fiscal profligacy (vigilantes moving against the US bond market is virtually assured - question is when and how). He also discussed the London Whale 'error' and went on to discuss the Greeks and the Eurozone's political and economic debacle in general. Some significant anti-administration rhetoric (ironic really), summed up with the veiled threat "Hey folks, if you think Washington and American Business can go to war with each other and it ends good - terrible error!"

Below are a few points Dimon made during the event:

On Investing in America: “The president, whoever he is next year, recognizes one thing for certain, they’re going into that office with a royal straight flush. I think this attitude, somehow, ‘how woe is me, how terrible, how America is lost. It’s just not true, folks. …This is still the best economy in the world. If you can invest in one place in this planet, it would be here.”

On JP Morgan’s London Trade Error: “We made a stupid error. I mean, we’re pretty disciplined risk people. But we made an error. We had a gap in the line. And, you know, we didn’t have this gap elsewhere. We have other flaws elsewhere, but, you know, we had a gap. We screwed up. By the way, that quarter, we made $5 billion. So yeah, it was a stupid error. … I should have caught it also. I didn’t. But it isn’t going to sink our ship.”

On Fiscal Cliff: “We have formed now a fiscal cliff war room, command center, all that kind of stuff going through to make sure we understand it all. We’ll be prepared. JP Morgan will survive the fiscal cliff. I just think it’s terrible policy to allow it to get close. ...There are all these potential outcomes and I would defy anyone to know what they are.”

On Greece and the Future of the Eurozone: “From an economic standpoint, Greece is not the issue. Greece is a couple of billion of dollars in debt. …The catastrophe is the default of Greece before you have a firewall to Italy and Spain, you’ll have a very good likelihood of a run on the banks in Italy and Spain. Italy and Spain don’t have the wherewithal to stop a run on the banks.”

At the same time, the WSJ reports that Douglas Braunstein (51 year old CFO) will be stepping down...

J.P. Morgan Chase's chief financial officer is expected to step down and is likely to move into a different job at the bank, according to people close to the company.

Douglas Braunstein, 51 years old, has been finance chief at the largest U.S. bank, by assets, since 2010. Before that, the longtime deal maker ran J.P. Morgan's investment-banking operations in North and South America and was heavily involved in the bank's acquisitions of securities firm Bear Stearns Cos. and the failed banking operations of Washington Mutual Inc. WMIH +1.69%

Mr. Braunstein's status was diminished as part of an executive shake-up in July. Since then, he has reported to Matt Zames, 41, the company's co-chief operating officer, rather than Chairman and Chief Executive James Dimon.

It isn't clear where Mr. Braunstein will land at the bank, but the possibilities include J.P. Morgan's recently combined corporate and investment bank, these people said.

Mr. Braunstein declined to comment on his position as chief financial officer.

Mr. Braunstein is among J.P. Morgan executives facing outside scrutiny over the bank's handling of the trading mess in its Chief Investment Office, or CIO, a unit that manages the bank's cash. J.P. Morgan suffered a trading loss of $5.8 billion in the first half of 2012, and about a dozen regulatory or law-enforcement agencies are conducting inquiries into the trades, internal accounting and risk controls at the bank, and the adequacy of its public disclosures, according to people with knowledge of the probes and securities filings.

"Jamie is a big fan of Doug's and any potential move Doug decides to make would be unrelated to the CIO issue," said a senior person at the bank.

Mr. Braunstein and other executives dismissed initial news reports about a trader known as the "London whale," who was roiling debt markets with his large bets. On an April 13 conference call, Mr. Braunstein told analysts, "We are very comfortable with our positions as they are held today." He described the bets placed by the Chief Investment Office as part of a "very long-term" strategy to hedge the bank's risks. Mr. Dimon referred to outside concerns as a "complete tempest in a teapot."

J.P. Morgan in July said that Messrs. Dimon and Braunstein relied on the assurances of others at the bank when making those statements. Mr. Dimon has said he was "dead wrong." J.P. Morgan has said it could have additional losses of $800 million to $1.6 billion from the trades. J.P. Morgan might update investors on the status of the trades when it reports third-quarter results Friday morning.

Great Stuff - Bear Stearns And The Whale Trade - only a 91% target bonus for you then...

Catharsis Ours

Wednesday, October 10, 2012

October 12 - Jp Morgan Earnings Release and note the exposure to Italy ! What could go wrong ? JP Morgan's CFO steps down - just interesting timing or something more to this ?