Tuesday, August 6, 2013

"JPMorgan Finds A Better Use For Its Commodities Brainpower Than Selling Electricity" (JPM; UBS)

From Matt Levine at DealBreaker: 

UBS is selling its over-the-counter commodity derivatives portfolio to JPMorgan, prompting John Carney to say this:
Here’s a good rule of thumb. When one bank buys a business from another bank, it’s almost always a case of regulatory arbitrage. It’s never really because of synergies or managerial talent or whatever other hokum the media relations churn out to their willing dupes in the press. It’s just about one bank being better able to take advantage of the rules.
So even though the rationale for JPMorgan Chase buying the over-the-counter commodities derivatives business of UBS remains mysterious, you can safely surmise this is regulatory arbitrage. Most likely, it’s got to do with capital requirements.
Umm maybe? I don’t know, this question seems a little over-determined; the thing is that pretty much everyone thinks that (1) JPMorgan is pretty good at running an investment bank, the occasional hiccup aside, and that (2) UBS is pretty crap at doing so. So are US regulators relatively more comfortable with JPM managing this portfolio than Swiss regulators are with UBS doing so? Sure, probably, but probably so are the respective shareholders, and counterparties, and senior managements, and anyone else you might ask. Really moving any portfolio of anything from UBS to JPMorgan is probably Pareto optimal.
The light irony comes from – well here is Bloomberg’s first sentence:
JPMorgan Chase & Co., which said last month it plans to get out of the business of owning and trading physical commodities from metals to oil, bought the over-the-counter commodity derivatives portfolio of UBS AG, which is exiting most of its raw-materials trading.
Hahaha you’re buying all these commodity derivatives at the same time you’re getting out of the physical commodities business, jerks. Banksters up to old tricks etc. But it’s interesting to think about why a commodities business that is after all run by the inventor of synthetic CDOs might be perfectly happy to expand its derivatives business at the same time it’s running away from physical commodities. Regulatory pressures, sure, but also a certain compatibility of mindset....MUCH MORE