Jamie Dimon's SNAFU: JPMorgan's Other Derivatives' Losses
In an August 2010 commentary about JPMorgan's losses in coal trades I wrote: "The commodities division isn't the only area in which JPMorgan is vulnerable. Credit derivatives, interest rate derivatives, and currency trading are vulnerable to leveraged hidden bets. Ambitious managers strive to pump speculative earnings from zero to hero."
At issue is corporate governance at JPMorgan and the ability of its CEO, Jamie Dimon, to manage its risk. It's reasonable to ask whether any CEO can manage the risks of a bank this size, but the questions surrounding Jamie Dimon's management are more targeted than that. The problem Jamie Dimon has is that JPMorgan lost control in multiple areas. Each time a new problem becomes public, it is revealed that management controls weren't adequate in the first place.
JPMorgan's Derivatives Blow Up Again
Jamie Dimon's problem as Chairman and CEO -- his dual role raises further questions about JPMorgan's corporate governance -- is that just two years ago derivatives trades were out of control in his commodities division. JPMorgan's short coal position was over sized relative to the global coal market. JPMorgan put this position on while the U.S. is at war. It was not a customer trade; the purpose was to make money for JPMorgan. Although coal isn't a strategic commodity, one should question why the bank was so reckless.
After trading hours on Thursday of this week, Jamie Dimon held a conference call about $2 billion in mark-to-market losses in credit derivatives (so far) generated by the Chief Investment Office, the bank's "investment" book. He admitted:Some of our posts:
"In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored."But lets get back to commodities. For several years, legendary investor Jim Rogers has expressed his concern to me about JPMorgan's balance sheet, credit card division and his belief that Blythe Masters, the head of JPMorgan's commodities area, knows so little about commodities. Jim Rogers is an expert in commodities and is the creator or the Rogers International Commodities Index. He also sells out-of-the-money calls on JPMorgan stock. So far, that strategy has worked out well for him. (Rogers gave me permission to publicly reflect his views and his trades.) Moreover, JPMorgan is still grappling with potential legal liabilities related to the mortgage crisis.
Is Jim Rogers justified in his harsh view of JPMorgan's commodities division? After he expressed his concerns, JPMorgan's coal trade made the news, and it appeared to me that Jim Rogers is on to something. For those of you who missed it the first time, my August 9, 2010 commentary is reproduced below in its entirety. Dawn Kopecki at Bloomberg/BusinessWeek broke the story wherein Blythe Masters' quotes first appeared:
JPMorgan's Losses from Indecent Overexposure - August 9, 2010
JPMorgan Chase's fixed-income revenue fell almost 28 percent to $3.6 billion in the second quarter, down from $5.5 billion in the first quarter, and down from $4.9 billion for the same period last year. JPMorgan blamed an interest rate squeeze and bad results in the credit markets and the commodities markets.
There were no details of its significant loss from unwise, gigantic, wrong-way wartime coal bets. The bank took a short position so enormous that it was oversized relative to the global coal market, and second quarter losses reportedly were in the hundreds of millions of dollars....MORE
Dec. 10, 2009
"Woman Who Invented Credit Default Swaps is One of the Key Architects of Carbon Derivatives, Which Would Be at the Very CENTER of Cap and Trade"
June 9, 2010
JPMorgan increases stake in China's Yanzhou Coal to 11.13% Loses Money on Coal Trade (JPM; YZC)
June 10, 2010
JP Morgan Buys MORE Yanzhou Coal, Upping Stake to 13.23% (JPM; YZC)
Dec. 29, 2010
Pierre Jovanovic’s New book on JP Morgan’s Blythe Masters Can Now be Ordered (in French) JPM
Dec. 22, 2011
UPDATED--Barclays Hit With "Immense" Copper Trading Loss; 50 Sigma Move In Cancelled Aluminum Warrants (50-Sigma events don't happen)
Mar. 16, 2012
Gold Manipulation, J.P Morgan, Dennis Gartman and a Whistleblower (JPM; GLD; SLV)
April 5, 2012
J.P. Morgan's Blythe Masters On The Blogosphere, Silver Manipulation, Gold-Axed Clients And Doing The "Wrong" Thing (JPM)