Friday, May 11, 2012

It's The Economy Stupid: JPMorgan Chase's Loss, Tempest In A Teapot???

Okie Dokie, after Jamie Dimon and JPMorgan Chase announced their $2 Billion loss on proprietary trading (that’s the current figure, even Dimon acknowledges the number could grow larger), pundits came out swinging.  Some wanting to outlaw prop trading, some defending prop trading, some wanting stronger regulation of prop trading.  However, the most ridiculous statement was when one pundit called the $2 Billion loss a “tempest in a teapot”.


Let’s divorce ourselves of the verbiage and look at the numbers.  I got all my numbers from JPMC’s March 31st Call Report that was filed with Federal regulators.  You can look them up yourself. Go to and type in JPMC’s ABA number, 021000021, and look for yourself.


JPMC Total Assets  $1,842.735 Billion (Yep, that’s a trillion and that’s a whole lot of zeros so I just rounded the number up to Billions)

JPMC Total Capital $134.305 Billion

Trading Loss $2 Billion

Loss as a Percentage of Capital  1.4892%

Loss as a Percentage of Assets 0.1086%

Total Capital as a Percentage of Assets 7.2884%

Effect of Loss on Capitalization  7.2884% - 0.1086% = 7.1798%


So, on its face, it looks relatively minor to the overall capital position of JPMorgan Chase.  But that’s not the whole story.  One has to ask a VERY pertinent question.  How many other derivate trades are out there and what is that exposure???


Once again, let’s look at the numbers from the JPMC March 31st Call Report.  For this I pulled the Call Report Schedule RC-L


Sold Position of Derivatives and Off-Balance Sheet Items:  $3,157.447 Billion

Purchased Position of Derivatives and Off-Balance Sheet Items:  $3,008.409 Billion


So, Total Assets of $1.3 Trillion.  Derivatives of $3 Trillion.  Total Capital of $134 Billion.  Tempest in a teapot?  Not so much.


Now, the net derivative exposure of JPMC  on paper is ‘only’ $149 Billion (the net of the Sold Position and the Purchased Position), but that number is larger than JPMC’s Total Capital.  And what the Call Report doesn’t fully explain is to what extent JPMC’s $6 Billion in derivatives is a balanced book.  For instance, if a bank’s Sold Position was $3 Billion in Interest Rate Swaps and its $3 Billion in its Purchase position was in Credit Default Swaps, (two completely unrelated derivative positions) then its net exposure is actually $6 Billion, the combination of the 2 numbers, not the net of the 2 numbers.  Now, I am relatively confident JPMC’s derivatives and off balance sheet exposure is pretty well balanced.  But we just don’t absolutely know for sure, and we don’t fully know to what extent.


Now, let me say plainly that my above analysis was very superficial, very elementary.  It was just for a simplistic mind like mine. And I hate to pile on JPMorgan at this time, but this is an issue that has bugged me for some time and JPMorgan is not the only bank that does this.  This is a problem of the system and it’s actually gotten worse since the 2008 financial meltdown.


Am I against prop & derivative trading?  Frankly, NO, absolutely not!  I think that is a business decision for the management, board of directors and shareholders of the bank.  However, I am DEFINITELY IN FAVOR of much greater capital requirements for banks that choose to engage in prop & derivative trading.


John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury


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