Remember when Jamie Dimon told the world the CIO stories were a "tempest in a teapot" during the firm's Q1 conference call the very same day we accused the CIO of being the world's biggest prop desk (aside from the Fed of course) and that the JP Morgan was merely "hedging" its positions? It appears that just like Vegas, it's the lie that keeps on giving. Because as it turns out in addition to being a massive undisclosed loss leader courtesy of 'unlimited downside' CDS pair trades (anyone remember DB employee Boaz Weinstein?) which have yet to be unwound, and which may have a total book loss of up to or over $31.5 billion as explained before, that was merely the tip of the prop-trading iceberg. The WSJ reports: "The JPM unit whose wrong-way bets on corporate credit cost the bank more than $2 billion includes a group that has invested in financially challenged companies, including LightSquared Inc., the wireless broadband provider that this month filed for Chapter 11 bankruptcy protection. The group within the CIO doing the distressed equity investing is known as the Special Investments Group. Whether it should be part of the CIO in the future is something that Matt Zames, who was put in charge of the CIO this month after the losses were disclosed, is evaluating, according to a person familiar with the bank. He is also examining whether the bank should keep some of these investments, the person said... The Special Investments Group last year took a $150 million stake in closely held LightSquared, in a deal that J.P. Morgan lost money on, according to a person familiar with the bank."
But, but, surely they were hedging their offsetting position in er, uhm, non-satellite, telegraph stocks? In yet other words, an SIO within the CIO... once again Wall Street's only value added shines through - baffle them with acronym-based bullshit. And of course, everyone is busy hedging, hedging, the firm's other positions... Or not: as these are pure play directional prop bets. And all are funded by, you guessed it, your deposit dollars. Which one day will go boom, when JPM suffers a loss so large that not even the Fed bails them out any more (Jon Corzine anyone?).
Shockingly, the lies do not stop here:
A J.P. Morgan spokeswoman said the Special Investments Group is funded by J.P. Morgan's holding company and not by bank deposits insured by the Federal Deposit Insurance Corp. The activities "are funded with company-issued debt and equity," the spokeswoman said.
Oh wait, so fungible electronic dollars have a tag on them saying they come from a deposit account or from debt issuance? That's odd - we were not aware of that. One learns something every day.
One also learns details about what could be an uber-prop desk not from a regulatory filing but from... LinkedIn?
The goal of the Special Investments Group, according to a LinkedIn post from an employee, Ian Rice, is to invest $1 billion a year "in a broad range of industries and geographies." Another employee of the group, Craig Fountain, said on his LinkedIn page that the group "seeks to take controlling stakes in companies J.P. Morgan has lent money to and are experiencing some degree of financial distress." Messrs. Rice and Fountain didn't return calls seeking comment.
As for what is in the filings we get yet another batch of lies:
J.P. Morgan regulatory filings say the CIO is among the units "responsible for measuring, monitoring, reporting and managing the firm's liquidity, interest rate and foreign exchange risk, and other structural risks." Last month, the bank's chief financial officer, Doug Braunstein, said on a call with reporters, "When we put a dollar to work we want to do so prudently and invest it in safe, smart and good-returning assets, and that is the job of CIO." Mr. Dimon said on the same call, "We are very conservative."
"Conservative" as in buying stakes in bankrupt satellite telephony providers? Got it.
Yet the irony that tops it all off:
What J.P. Morgan appears to be doing with its Special Investments Group—putting holding-company money behind a specific company—wouldn't be barred by the Volcker rule even if it is a risky bet, said Arthur Wilmarth, a law professor at George Washington University. He said the practice is known as "merchant banking."
"Volcker crimps down on private-equity funds, but merchant banking is still out there," Mr. Wilmarth said. "Do I think that's a good idea? No. I don't think banks are good at it."
In other words, there is nothing that can be done?
Wrong - here is the solution so simple, that we can see how every brilliant regulator, politician and banker has not come up with it:
CAP BANK POSITION PROFITS, EITHER FLOW OR PROP, AT 5%.
Bailed out banks want to put capital at risk? Fine - treat them like utilities. Which means a cap on any upside: no semantics, no prop vs flow distinction, just cap all positions: which will make the Upside/Downside calculation so much simpler for all bank portfolio managers.
Oh, and when they blow up next time, no bail outs. Ever again.
