Friday, 18 September 2009 01:00

An Independent Look into JP Morgan Featured

The JP Morgan forensic preview is now available. Remember, this is not subscription material, but a "public preview" of the material to come. I thought non-subscribers would be interested in knowing what my opinion of the country's most respected bank was. There is some interesting stuff here, and the subscription analysis will have even more (in terms of data, analysis and valuation). As we have all been aware, the markets have been totally ignoring valuation for about two quarters now. It remains to be seen how long that continues.

Click graph to enlarge


Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who". Now, I am not saying JPM is about to collapse, since it is one of the anointed ones chosen by the government and guaranteed not to fail - unlike Bear Stearns and Lehman Brothers, and it is (after all) investment grade rated. Who would you put your faith in, the big ratings agencies or your favorite blogger? Then again, if it acts like a duck, walks like a duck, and quacks like a duck, is it a chicken??? I'll leave the rest up for my readers to decide.

This public preview is the culmination of several investigative posts that I have made that have led me to look more closely into the big money center banks. It all started with a hunch that JPM wasn't marking their WaMu portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! ), which would very well have rendered them insolvent - particularly if that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent). I then posted the following series, which eventually led to me finally breaking down and performing a full forensic analysis of JP Morgan, instead of piece-mealing it with anecdotal analysis.

  1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
  2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
  3. As the markets climb on top of one big, incestuous pool of concentrated risk...
  4. Any objective review shows that the big banks are simply too big for the safety of this country
  5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

You can download the public preview here. If you find it to be of interest or insightful, feel free to distribute it (intact) as you wish.

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

Reggie Middleton on CNBC's Squawk on the Street - 10/19/2010, discusses JP Morgan, bank risk and technology and is the only pundit in the financial media that we know of that called Apple's margin compression issues and did so successfully just hours before they reported! Click here or click below to see the video.


Last modified on Thursday, 30 June 2011 08:59


  • Comment Link alfred benton Friday, 17 December 2010 08:08 posted by alfred benton

    I totally agree w/you Reggie. The US is like a Merry-go-round with only 3 horses riding on itl you have the Federal Reserve, the US treasury and JPMorgan....the first is the printer and holder of another 12 to 15 trillion of hidden US debt all cammouflaged at the Fed...and that's on top of the 14 trillion we already know about, the next is the spender and JPMorgan is the bagman artificially holding the long rates low tru their 90 trillion of derivatives.

    Oh yeah, as far as the US gold reserves are concerned: they are mostly ALL gone,,,,and if you want to know where it went, just ask the Rubin and Summers team from the clinton era!!!

  • Comment Link Youri Carma Friday, 17 December 2010 00:11 posted by Youri Carma

    If it acts like a duck, walks like a duck, and quacks like a duck, it still could be Dick Cheney in his hunting duck suit quacking his duck flute but in either case: Shoot Immediately! :)

    Keep up the insanely good work!

  • Comment Link Reggie Middleton Tuesday, 22 September 2009 15:46 posted by Reggie Middleton

    Yes, I did mean BBB and below. The first "below" was a typo. thanks for the heads up, and be aware that there is a thin line between BBB and the rating right below it, which is considered junk. Don't get so hung up on semantics that you miss the relative position of the portfolio. BBB is the threshold for junk status.

  • Comment Link Reggie Middleton Tuesday, 22 September 2009 15:43 posted by Reggie Middleton

    The work takes into consideration all publicly available data that we could dig up. thanks all for the heads up re: the typos, which have all been corrected.

  • Comment Link prescient11 Tuesday, 22 September 2009 09:58 posted by prescient11

    Reggie, I remember you calling JPM insolvent almost a year ago. I think you were 100% correct. Question though, does your analysis take into account the fact that the US Govt. came in and backstopped a lot of their bad "acquisition" stuff. Are you taking into account the loss-sharing agreements in your analysis? Many thanks for all your thoughts and analysis.

  • Comment Link small potato Sunday, 20 September 2009 15:15 posted by small potato


    I appreciate your making available a portion of your insightful analysis. I have a couple of trivial questions though. 1) When you mention BBB rating,"net derivative exposure rated below BBB and below for JPMorgan currently stands at 35.4%" on page 6, do you mean "rated at BBB or below"? Because the way it is written, I would think 35% of JPM derivatives are rated junk rate. But it is not. Only 23% is junk rated, still a very high number nonetheless. But I could be wrong. Would you clarify on that please?
    2) I think on page 8 it should've been "1.8% in Q408" not "Q409". This happens at a few other simlilar places on the same page as well. What do you think?

  • Comment Link zack Saturday, 19 September 2009 23:46 posted by zack

    JPM is the death star of the NY Fed. The NY Fed is really the "brains" of the Fed (they only have branches to make it like a "distributed system" versus a central bank of the US). Based on the "business plan" of this crisis is it more likely that they get bigger or smaller?

    relevant quote:
    Public opinion has been misled. The US government is in a sense financing its own indebtedness: the money granted to the banks is in part financed by borrowing from the banks.
    The banks lend money to the government and with the money they lend to the government, the Treasury finances the bailout. In turn, the banks impose conditionalities on the management of the US public debt. They dictate how the money should be spent. They impose "fiscal responsibility"; they dictate massive cuts in social expenditures which result in the collapse and/or privatization of public services. They impose the privatization of urban infrastructure, roads, sewer and water systems, public recreational areas, everything is up for privatization.
    The recipient banks are the beneficiaries as well as the creditors. As creditors, they will oblige the government a) to slash expenditures b) to run up the public debt through the issuing of treasury bills and government bonds.

    By the way, this "control by indebtedness" is an old school Business plan (read World Bank/Chase Bank and most of the world).

    relevant video: Watch from TIME 825-1320 in this video: highlights Our job was to convince other countries to take huge loans,say Ecuador to take huge loans of $1 Billion, to build infrastructure, which would only serve the wealthiest people... A few of their people would get really wealth as would ours, but they are stuck with this huge debt. Eventually, they would have to spend 50% of their budget for debt service. We then tell Ecuador since you can't pay off your loans, we need you to...[watch for more]

    There's the play book folks. Just like Chase (ie World Bank) - woops now JP Morgan - helped dominate via debt outside the US, isn't it likely they are doing this now inside the US?... they really cranked up our debt in the last while!

    So the plan here is to allow these banks to get bigger, not smaller via this fiasco. Oh sure, there will be some pain along the way because they really f'd up and they have to show they have skin in the game. However, betting against JPM is probably the stupidest move one could make.

    Just wait for bits and pieces of this country are privatized in a desperate attempt to appease the beast. I hear water is the "en vogue" public resource that the creditors like to collect on these days...

  • Comment Link Reggie Middleton Saturday, 19 September 2009 12:07 posted by Reggie Middleton

    @pokernash: honestly, its a crapshoot in determining the real quality of the AAA assets. Many of the derivatives are interest rate derivatives and mortgage related assets. One thing is for sure, if the AAA was trash, the BBB and below stuff is most likely trashier.

    @David Yaseen: You're right, I meant "t"rillion, not billion. Thanks.

  • Comment Link mansoor h. khan Saturday, 19 September 2009 02:48 posted by mansoor h. khan

    A Radical Solution for America's Insolvent Financial System
    The core problem of the United States' banking system (and maybe the world's banking system) is not liquidity but insolvency. The liabilities of the United States' banking system exceed the value of its assets. The issue is not only the toxic assets (toxic mortgage backed securities, toxic commercial real estate loans, sub-prime mortgages, alt-A loans, adjustable loans likely to go bust, increase in prime mortgage default rates, etc) but also off-balance sheet liabilities (such as expected huge unaccounted for future derivatives losses).
    This means that bailouts are just beginning and will require bigger and bigger sums of taxpayer money as time goes on. The government will resort to borrowing more and more and eventually to printing money when treasury debt auctions start failing. The end result of this path is a currency collapse and probably total chaos as expected by gold bugs.
    One other way to deal with this issue is to stop the bailouts and let the dominoes fall. Defaults and cross-defaults will cause many, many depository institutions (even very large ones) to collapse leading to extreme decrease in money supply as bank deposits are destroyed. Deposits of failed banks cannot be used to pay bills, make purchases and/or service debts.
    Which will probably lead to even more defaults as unemployment increases and debtor's are unable to service their debts. This process will probably cause extreme deflation as businesses lower prices in a bid to survive. This will also lead to wage cuts, increased unemployment and a deflation spiral and much chaos. But probably less chaos than a currency collapse.
    Is there a better way?
    Here is my idea:
    1) We essentially need an orderly bankruptcy and liquidation of the United States' financial system.
    2) I suggest we create a government owned bank and transfer all deposits of the private commercial banking system to the new government owned bank. This "transfer" is really just new money creation. This new money will be digital cash (electronic version of physical paper cash). Very much like reserves at the FED.
    3) Note that the plan will not create net new money since we will be destroying all deposits of the commercial banking system in the process.
    4) All assets of the commercial banking system will be transferred to the government and auctioned off in an orderly manner over the next 10 years. The proceeds from the sale would go the United States treasury and not the commercial banks. The assumption here is that commercial banks deserve nothing since the entire industry would have been most likely destroyed any way. Even good banks would have been destroyed due to bank runs and defaults if the government had allowed the dominoes to fall. Of course bank shareholders, bank bond holders and counter parties of bank derivatives would not receive anything.
    5) After the transfer FDIC protection will be removed for any private bank which wishes to remain in business or any new private depository institution or bank. From that point on the government should make it absolutely clear that there will be no more bailouts and no more conversions. This will discourage (but not completely eliminate) fractional reserve deposit banking and private money creation that results from pyramiding of government created money. This will also limit debasement of the currency that results from fractional reserve deposit banking. In fact, we can have "free banking" from that point on and not even have reserve requirements or capital requirements. All depositors who use private banks will be fully at-risk. The industry will have to set the interest rate high enough to attract depositors.
    6) The new government bank will act as an electronic "piggy bank" only. All deposits will be 100% reserve and it will not make any loans. Loan making will be left to the private banking system (with no deposit insurance or a possibility of a future bailout). The new government owned bank exists only as a "safe" money storage and a payment clearing system so the public does not have to carry around physical paper cash to make purchases and pay bills.
    7) Of course this plan is not without pain or cost. Cost of funds for banks and borrowers will probably rise as bank deposits are a source of very low cost money for the banks. Nothing is free. We are just exchanging higher cost of funds for removal of systemic failure risk. Economically we are recognizing that when money is loaned there is always credit risk.
    8) We are just separating the payment and clearing transaction system which is absolutely necessary for day-to-day commerce (no credit risk) from the loan banking and investment system (has credit risk).

    Mansoor H. Khan

  • Comment Link NDbadger Friday, 18 September 2009 21:27 posted by NDbadger

    I agree with you Reggie, and Marc Faber makes the same point and I agree with him:

    Yet the timing is difficult to determine. Faber says it could be 5 years out. You seem to believe it could happen much more quickly. What are you thinking would be the catalyst for the implosion?

  • Comment Link David Yaseen Friday, 18 September 2009 17:50 posted by David Yaseen

    Hi Reggie,

    On the graph, you wrote "...outstrips the entire world's economy by $21 billion." You meant to say "trillion," right?

    Keep up the good work,

  • Comment Link pokernash Friday, 18 September 2009 17:49 posted by pokernash

    Reggie, you make a point that 34% of JPMorgan's derivative exposure is BBB and below. After last year, most of the non investing interested public now knows that "AAA" rated securities were total garbage or "toxic waste." Assuming that derivatives and securtized loans are a different breed, are the 40% plus of AAA derivatives that JP Morgan holds possibly toxic as well ? Or are derivatives rated on an honest system by different ratings agencies.
    In other words, should they be worried by more than just the 34% of BBB and below.

  • Comment Link Ned Friday, 18 September 2009 11:57 posted by Ned

  • Comment Link Ned Friday, 18 September 2009 09:38 posted by Ned

    It's entirely appropriate to examine JPM's exposure relative to the entity to which it ultimately would [financially] depend upon in the event of it's collapse.

    The email you received is incorrect and frankly sounds like a 'long' investor defending its position.


  • Comment Link Reggie Middleton Friday, 18 September 2009 08:09 posted by Reggie Middleton

    I just received this message via email:
    [quote]Comparing JPM exposure to countries GDP is ridiculous, you know what else is huge compary to macau's GDP, US GDP!

    Of course a country so large will have a banking system large relative to other countries, that doesnt mean(on its own) that the banks are in trouble

    I think this reader is missing the point, entirely. I really do not see the problem in putting JPM's exposure into the context of GDP. It helps prevent the numbness that comes from hearing billions and trillions everyday in the news and assists you in looking at things from a realistic perspective.

    The reader posits that it is ridiculous to compare JPM's exposure to Macau, after all the US is bigger than Macau, too. Well, Macau doesn't backstop the US against failure, now does it. If it did, then teh US's size relative to Macau would indeed be a very big deal. The US back stop's JPM, whose notional exposure to derivative is 6x that of the US GDP, and it backstops many, many other banks, insurers and car companies as well.

    For instance I never said JPM was in trouble because its exposure was XXX% of YYY GDP, I said [u][i][b]WE were in trouble because of it.[/b][/i][/u] If you don't like the comparison to Macau, how about the comparison to the whole world. The point of the exercise is to drive home the relative size of the risks and exposures that JPM and the large money center banks have taken (and are still taking), and not to say JPM is "in trouble" because its troubled loan portfolio is larger than the GDP of Macau (even though I find that to be rather interesting trivia as well).

    Now, that I have explained the reason for the inclusion of those pretty graphs, let' revisit "break 'em up and break 'em up now, the last section in the post [url=]Any objective review shows that the big banks are simply too big for the safety of this country[/url]

Login to post comments