Thursday, June 14, 2012

Mommy Ben Nourishing the Big Banks

Thanks to Ben Bernanke and the Federal Reserve policy of negative real interest rates and excess liquidity there is plenty of the easy money, "mother's milk," for speculation. Just ask, Jamie Dimon, the CEO of mega-bank JP Morgan.

Jamie Dimon happily dove into the big pool of easy money that the Federal Reserve has created and was looking to make a big splash, speculative profit. Unfortunately his bank hit a rock when its Chief Investment Officer (CIO) took the wrong gamble.

Don't worry Jamie, Mommy Bernanke and President Obama have got your back.

Yves Smith / naked capitalism:
Dimon Testimony Whopper: CIO's Gambling on Disaster = “Portfolio Hedging” --

Well, there’s nothing like seeing Jamie Dimon swinging for the fences. Dimon has taken his defense and turned it into an offense, in both senses of the word.

In Senate testimony, Dimon revealed his idea of “portfolio hedging” to be even more egregious than the harshest critics thought. Dimon presented the job of the CIO was to make modest amounts of money in good times and to make a lot of money when there’s a crisis...

We argued yesterday that Dimon was running a hedge fund in the CIO, and his testimony confirms that. As we wrote:
It’s likely that a significant portion of the CIO’s activities were an accounting gimmick. Let’s remember why it was located in Treasury: it is the chief “investment” office, because it is managing the “investment” portfolio. Banks hold liquidity buffers so that they can meet a bank run. They get special accounting treatment on these positions. While they can sell them at any time, like trading inventories, they are NOT marked to market. Instead, they are kept in an “available for sale” portfolio, which is treated on a hold to maturity basis. That, in really crude terms, means you don’t need to recognize losses until they look pretty certain (usually, credit related).

So what does that mean, in practical terms? It means the CIO is the perfect prop trading/income smoothing vehicle. You can realize gains whenever you want to, by selling (provided the position is in a reasonably liquid market) or possibly even moving it over into your trading portfolio and you can defer most losses. If it makes a turkey trade, it can bury it until the bank has other trading gains or income in other businesses to offset it. And it can keep profitable positions around and realize them as needed to smooth earnings (while the unrealized losses are reported in footnotes, most investors don’t seem to pay much attention to that item). Investors really like smooth earnings, they mistake them for stability and strength of the business, as opposed to adept profit management. No wonder the people in the CIO were so well paid. They’d have to be Dimon’s favorite people.
The Daily:
SEAL OF APPROVAL --  JP Morgan boss flashes presidential bling at Senate hearing

Jamie Dimon weathered protesters and questioning at a Senate Banking Committee hearing today about JPMorgan's $2 billion in trading losses — armed with cufflinks that appear to be inscribed with the presidential seal.

The CEO that President Obama deemed "one of America's smartest bankers we've got" after the trading loss debacle, flashed a not so subtle message to the lawmakers that the boss has his back.

In more than one picture, Dimon was seen with the seal cufflinks visible. The seal reads "Seal of the President of the United States" and includes the arrow-carrying eagle...

Thank you Jamie for reminding all of us who really runs this country.

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