J.P. Morgan’s Position Going Into Its Quarterly Call

Bloomberg.com – JPMorgan Silence on Risk Model Spurs Calls for Disclosure
JPMorgan Chase & Co. (JPM)’s multibillion- dollar trading loss exposed an industry practice that U.S. regulators are now likely to clamp down on: Banks keep investors in the dark about how they calculate trading risks. The U.S. Securities and Exchange Commission is probing JPMorgan’s belated May 10 disclosure that a change to its mathematical model for gauging trading risk helped fuel the loss in its chief investment office. While the SEC would have to prove that the biggest U.S. bank improperly kept important information from investors, regulators probably will press Wall Street firms to tell more about the risks they’re taking, three former SEC lawyers said. “The SEC and investors are learning that apparently the compliance folks and financial folks at very senior levels at JPMorgan do not think it’s important to share really significant modeling changes,” said Elizabeth Nowicki, a former attorney in the SEC general counsel’s office who’s now an associate law professor at Tulane University in New Orleans. So far, New York-based JPMorgan has added a warning in its most recent quarterly report that risk models are continually tweaked to account for “improvements” in modeling techniques, and the head of the SEC has publicly asserted that banks should disclose significant changes and the reasons.

Bloomberg.com – Dimon Risk Reputation on Line as JPMorgan Faces Analysts
Jamie Dimon will seek to restore investor confidence this week after a trading loss wiped out $39 billion of JPMorgan Chase & Co. (JPM)’s market value and marred his reputation as one of the industry’s best risk managers. In a departure from his customary earnings-day conference call, Dimon will meet analysts for two hours on July 13 at the bank’s New York headquarters to field questions about the loss and what he’s doing to contain the damage. The firm also is being probed over the possible gaming of U.S. energy markets and was subpoenaed in global investigations of interest-rate fixing…Investors “want to know what happened, they want to know what Dimon knew and when he knew it,” said SNL’s Bush. “I don’t know if he’s going to be able to tell them that, because there’s always the consideration of what lawyers are going to be listening for and what they will jump on.”

The Wall Street Journal – Claw Is Out for ‘Whale’ Officials
J.P. Morgan Chase & Co. plans to reclaim millions of dollars in stock from executives at the center of the trading blunder that shocked Wall Street and tarnished the reputation of Chief Executive James Dimon. The nation’s biggest bank is expected to claw back compensation from individuals including Ina Drew, who ran the company’s Chief Investment Office, or CIO, according to people familiar with the bank’s plans. Ms. Drew was a top lieutenant of Mr. Dimon’s before she resigned this spring following the disclosure of the trading losses. The bank could disclose the plans as early as Friday when it announces earnings, these people said. The clawback amounts were still being determined this week because of the complicated formulas and conditions for imposition, according to one person familiar with the situation…J.P. Morgan is expected to announce Friday that the trading blunders will cost the company just over $5 billion in the second quarter, in which the bank is expected to show a profit, according to people familiar with the situation. The company’s future losses on the trade are projected to stay below $1 billion, the people said, and could result in profits of that much if the market turns in the company’s favor. J.P. Morgan is confident that the losses have been capped because 80% to 90% of the botched bets already have been closed out, these people said.

Comment

This Friday, before the market opens, J.P. Morgan will announce its quarterly results, offering details on where they stand with the London whale positions.  In the past we have been skeptical that J.P. Morgan has unwound the majority of its position based on the large amount of investment grade series 9 CDX securities still outstanding.  The highlighted statement in the story above indicates their position is between 80% and 90% closed.
It is thought that J.P. Morgan was long a large amount of  CDX.NA.IG.9 10-years and attempted to hedge it with a position in CDX.NA.IG.17 5-years.  Once the spread between these two securities began to became unstable, as the second panel shows, J.P. Morgan ran into problems.
Yesterday the DTCC released the latest data on the notional amounts outstanding in the CDX markets.  As the chart below shows, as of July 6, the net notional amount of CDX.NA.IG.9 10-years outstanding was slightly more than $183 billion.  This is down from a peak of roughly $215 billion on June 1.
If this supposed trade is set up as described, this net notional amount would have to plummet much more substantially to indicate a true unwind.  It is not as if J.P. Morgan can try to hedge the position away given the high and rising spread between the two series shown below.  Unfortunately this is all speculation until J.P. Morgan chimes in with details on Friday, so count us among the many who will be listening in on the call.
Click to enlarge:

Source: Bianco Research

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