US Bank Derivative Exposure

@WTF? $90 Trillion dollars derivative exposure for JPMorgan ? No wonder the Fed “rescue” of Bear Stearns was via JPM — it was their own derivative exposure that was at risk.

Good point, Barry! I think you nailed it. It was in JPM’s own best interests to step in with a big assist from the Fed and probably taxpayers……

Yikes – at 14 bp change in the derivatives book wipes out JP Morgan’s Tier 1 capital. Their goose is cooked! Unless the Fed keeps them on their protected endangered species list. Hah!

Add $90 trillion to the US Deficit when that comes about. Oh, Dennis Neale, you’ll argue it’s notional, so the true hit will be less than ten percent of that, geez only $9 trillion.

Utterly mind boggling. The US deficit is 9.5 trillion now – not counting the GSE’s, Social Security…

JP Morgan written alot of the BSC credit default swap contracts. If we think back to that weekend, the Friday before and the week after, look at what happened.

JPM buys Bear for ultimately $10/share, and saves tens of billions of losses they probably would have occurred if Bear failed. Fed helps organize.

Those holding CDS protection on BSC on Friday, were heavily IN THE MONEY. On Monday, their CDS contracts were worthless. So, they have to unwind other positions that were working: sell commodities, cover shorts, etc..

The week after BSC deal, here is what the indices did:

GOLD: -8%
OIL: -6.3%
NAT GAS: -8.2%
CRB INDEX: -7%
XLF: +10%
FRE: +50%
FNM: +50%
USD: +1.5%

data courtesy of ContraryInvestor.com

The point is that a failing Bear would bring systemic issues to all financials, with the writers of the CDS contracts first in line to take huge losses. Here in comes JPM.

1) We are all subprime now
2) We are all derivatives now
3) We all are subjected to the massive ponzi financial scheme that’s needs to perpetuate to keep the increasingly fake and bullshit US economy going.

Exactly. The BSC rescue was not a rescue of BSC.

So, to extend this line of thinking, who has exposure to Lehman, WaMu, Regions, or any other entity deemed “small enough to fail”? Given that FRE and FNM are too big to fail, the question becomes: what are the systemic consequences when a bank is allowed to fail without a take-over, take-under etc.?

LEH is probably going to be forced to sell assets and might survive in some form. Hard to see how WaMu can keep going. So who are the counter-parties?

Let me go one further with an illustration. Suppose JPM’s financials showed it had $20bn CDS exposure to GM. That, more likely than not, is going to be $10bn each way with 2 different counterparties. So their net exposure is $0 unless the counterparty that ends up owing $10bn can’t pay up.

WTF? $90 Trillion dollars derivative exposure for JPMorgan ?

The chart says:

JPM $91,592,580 and notes $(000s)

That’s Billions not trillions.

~~~

BR: RD, thats tier 1 — look at the 3rd column: (widen your browser window)

JPM $90,408,468,778 (All figures in $000):

Dems’ trillions, baby!

Here is my interpretation of this data. BUY GOLD!! BUY GOLD!!! BUY GOLD!!!

Look, I think the entire Financial System in the US is FUCKED! Get it?

The thing that amazes me is that apparently no one ANYWHERE did anything wrong???

Now, that my friend is the greatest WTF of all times!

Barry,
I challenge you to construct a list of money center and regional banks that are NOT at high risk of failure. I can’t think of any.

Large Number’ of Banks Mis-Marked Assets, U.K. Regulator Says

Incorrect securities pricing found at Credit Suisse Group AG, Morgan Stanley and Lehman Brothers Holdings Inc. is more widespread and will be investigated, the U.K.’s financial regulator said today.

The Financial Services Authority said it will begin the probe next year after finding that securities valuations at a “large number” of London banks were “materially flawed or inadequate,” the agency said. The problems may worsen if banks fire compliance and risk officers, the FSA said.

“We recommend that you consider carefully any headcount reduction exercises that will affect valuation-control functions at this sensitive time,” FSA Chief Executive Officer Hector Sants wrote in a letter to CEOs last week and made public today.

Incorrect pricing on London trading desks has contributed to $2.8 billion of writedowns. The FSA letter comes a week after the U.K. operations of Credit Suisse, Switzerland’s second- largest bank, was fined 5.6 million pounds ($10.6 million) for failing to properly oversee pricing of asset-backed securities.

Spokeswoman Teresa La Thangue declined to say how many mis- marking incidents the FSA has uncovered or name companies targeted. “The fact that we’ve sent a `Dear CEO’ letter isn’t unprecedented, but it’s rare,” La Thangue said. “It means that it’s an issue we’re taking very seriously.”

The FSA will be visiting firms and “wielding a big stick,” said Patrick Buckingham, a regulatory lawyer at Herbert Smith and a former Lehman Brothers in-house lawyer. “The FSA has been chomping at the bit to bring an enforcement case based on a lack of systems and controls.”

`Negative Adjustments’

Credit Suisse joined at least three of its competitors in identifying incorrect pricing this year. The Zurich-based bank had to write down holdings by $2.65 billion when it discovered the mis-pricings.

Morgan Stanley suspended a credit trader and disclosed $120 million of “negative adjustment” in June relating to erroneous valuations of his positions. The New York-based firm said it was cooperating with authorities in London and conducting an internal review. The internal review is continuing, London-based spokesman Wesley McDade said today, declining to comment further.

Merrill Lynch & Co., the third- largest U.S. securities firm, said in May it was probing a trading desks in London and suspended a trader after discovering he may have overstated the value of some of the bank’s equity derivatives.

Overstated

The trader, who Merrill declined to identify, traded derivatives based on individual stocks for the firm’s own account, according to a person with direct knowledge of the matter. Merrill initially determined that he may have overstated the value of some holdings by less than 10 million pounds in April, when his marks were detected, the person said.

In March, Lehman Brothers, the fourth-largest U.S. securities firm, suspended two London-based equity traders after internal controls identified “issues” on share valuations. The sums involved were “not material,” an official for the company said at the time.

The regulator hasn’t yet investigated the banks. The fine levied on Credit Suisse was based the bank’s own review.

The marking incidents reflect common traits, including poor oversight of traders and a lack of seniority for product-control staff, the FSA’s letter said.

The nominal amount is not a good indicator of risk. First, it is likely that some of those derivatives positions are hedging other derivative positions, resulting in a reduced net exposure. Second, nominal is not a very good measure of risk.

OK, definition time — exactly and specifically what ARE “OBS derivatives”? I looked at the source link, and did not see an acronym dictionary for OBS.

I assume that this is a “worst-case” exposure value, possibly obtained by summing the absolute values of derivatives written and purchased, which would tend to generate a ridiculously large sum, and ignore hedged positions.

Please educate me on this. I did some order-of-magnitude number checking, and came up with the net asset value of the United States (households and corporations, via wikipedia) as being in the $90 trillion ballpark. These are BIG numbers.

In any event, there is no danger that the taxpayer is going to be on the hook for this derivative exposure. When companies (or people) go bankrupt, the difference between what they owe and what they have goes up in smoke. FDIC coverage is extremely limited, so it’s not going to put a major hurt on Uncle Sam.

The banks’ creditors and customers, and whomever is on the other side of these derivatives trades, is another matter.

note to all those in confusion over billions vs trillions:

The note at the bottom says to add three zeros to all the above numbers. The tier 1 numbers make sense when you do that. When you add three zeros to the derivatives column, you get TRILLIONS.

Yes, that’s some BIG NUMBERS. While it could be that someone mixed the wrong scale of numbers into the derivatives column, the spread column (the rightmost column that indicates the number of basis points that the derivatives need to change by to wipe out the tier 1 column) tends to make everything internally consistent, if not entirely rational.

Great post and agree 100%…just a bit puzzled at Barry’s tag line which indicates some surprise at JPM’s derivative book (unless he is feigning surprise for satirical purposes)…because this was all known way back. Barry posted on it back in March…I commented as well that the real bailout was for JPM:

The real bailout was for JP Morgan, not Bear. They get to keep the lid on their garbage for awhile longer and get to pick up assets at what appears to be a rock-bottom price.

Posted by: Steve Barry | Mar 30, 2008 8:42:47 AM

Well, nothing is as it seems. Bof A bailed out Countrywide just in time before the government had to bail them out and a month later, B of A was suddenly a new member of the Dow Jones Industrial. A reward? JPM is in big trouble with derivatives because most of these type of securities are handled by the Private and Investment Bank divisionsof these institutions, where trading regulations are not under the SEC, NASD, etc. If you will notice, JPM, Citigroup and BofA, all of whom have huge private and investment banking divisions, have the highest derivative exposure. Again, no coincidence. We will never know the extent of the crises for years. Also, my last post should have said that in (000) means to add 3 zeros to the number shown (I had a typo and said 2). So we are talking in trillions and the numbers are high because of obscene leveraging. The deleveraging will take a long time and be painful for all of us.

I’m betting it’s a slide error

Buffett has talked about all these trillions in derivatives many times over the years, and he calls derivatives:

WEAPONS OF MASS FINANCIAL DESTRUCTION.

As usual Buffet knows what he is talking about and has direct experience in how worthless these things are. Years ago Buffet bought GenRe (a reinsurance company) and he got a small book of derivatives (a few hundred million) with the purchase. He found that he couldn’t even sell the things and eventually he took a bath to the tune of the several hundred million. He said no one really understood them and if he couldn’t sell the derivatives when things were calm, imagine what it would be like when the markets are riled. Once again we are finding out Buffet was right and way ahead of his time again.

References for the above information recently can be found in Berkshire Hathaway’s annual reports.

OBS = Off balance sheet

thanks, pescayolas, for the link…that table is very informative, particularly the “bilaterally netted” exposure calculations. since USB (not UBS) is my biggest single holding, I watch it like a hawk and this was additional reassurance

dallas I am questioning whether it is actually true that “a 14bp move” wipes out JPM’s capital–I think their derivative book is largely matched and that therefore moves in rates may change the roster of counterparties to whom JPM is exposed but not its aggregate net dollar exposure. But no one has answered my question posted above about whether that is true and, if so, what is the significance of the 14bp figure in the chart.

The term Tera dollar ($100 trillion) was first used to describe the notional exposure of JPmorgan during the Bear takeover. They have shrank things a bit, but the netting risk of CDS still loom very largely. Even internal netting of some of the notional amounts still leaves huge exposure to a large EOD or multiple small EOD’s which could overwhelm either the ability to find securities or cash to settle.

JPM derivatives number seems incredibly high because, it has been said, they are not covering only for themselves, but act as the main agent leveraging for US Treasury. Can anyone corroborate this?

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Below is an email I sent to Bloomberg to try and get someone to investigate JPM and the Tresury’s back door payments of $138 Billion Dollars. I still have no answers after contacting (WSJ, Bloomberg, CNBC, NY Post, Nancy Pelosi, etc.. except as reported below)

I wrote to you a couple of days ago asking you to look into an $87 Billion Dollar payment from the Treasury Department to J.P. Morgan Chase that was made on behalf of Lehman Brothers because I thought it should be big news and brought out to the publics attention that the Treasury tried to shoot this payment for Lehman under the radar. If we can’t TRUST HENRY WITH $87 BILLION why on earth would we give him $700 BILLION?

I contacted this group (Money and Markets) with the same request I made of you. And the confirmed a payment of “$87 billion in repayments to JP Morgan Chase for providing financing to underpin trades with bankrupt investment bank Lehman Brothers, etc.,”

If you read down their story (Below) they add the $87 Billion Dollar payment into the ongoing cost of the bail outs. They must have found the same information the reporter that wrote the original story found on that payment being made.

Why isn’t a secret $87 Billion Dollar payment Big News? What else are these guys doing and or hiding? Why is J.P. Morgan Chase involved? Don’t they hold 50% of the World CDS contracts and exposure? Weren’t they forced to buy Bear Stearns to keep Bear’s CDS exposure out of the Bankruptcy Court’s scrutiny? (And therefore out of the public’s scrutiny) And now they make $138 Billion in advances to bankrupt Lehman to settle CDS contracts, get the Treasury to pay them back $87 Billion on the QT and What about the balance of $51 Billion? Did they eat that loss or will Lehman pay them back?

Why is it Soooooooooooo important to J.P. Morgan Chase and the Treasury to keep the derivatives & CDS story out of the press? Is J.P. Morgan Chase insolvent and WAY TOO BIG to fail or bail out? How many TRILLION would that one cost? Is the $700 Billion Bail Out just a side show to distract the market and public from the real problem?

Regards,

Jim