When it rains, it most certainly pours. It's been nearly two months since Jamie Dimon disclosed that JPMorgan's (NYSE:JPM) CIO office had accumulated $2 billion and counting in losses on a credit derivatives trade gone awry, and the largest U.S. bank by deposits just can't seem to catch a break. Just when the media had the public convinced (by way of a questionable interpretation of increased activity in the IG9 prior to single-name CDS and index option expiration) that the firm had sold-off three quarters of the assets responsible for the outsized losses, Reuters reported Tuesday that the Federal Energy Regulatory Commission (FERC) has subpoenaed the firm for e-mails relating to its power trading activities in 2010 and 2011.
Put simply, JPMorgan has resorted to claiming attorney-client privilege in seeking to prevent the FERC from accessing some 53 e-mails that the Commission believes could shed some light on claims by California grid operators that JPMorgan traders manipulated energy prices to the tune of $73 million. Allegedly, JPMorgan used a bidding strategy that allowed it to trigger a 50% overpayment of bid-cost recovery. While the investigation is ongoing, aggressively asserting attorney-client privilege in order to stymie the requests of a federal agency certainly does not make the firm look innocent.
In addition to this, the bank was downgraded Tuesday by well-known banking analyst Meredith Whitney who said she would have downgraded the firm sooner had it not been mired in the fallout from the CIO debacle. Notably, Whitney did not seem optimistic about the firm's upcoming earnings report:
"...we don't think there will be incredible appreciation in book value. These banks are not even earning their cost of capital. In light of what happened with this proprietary loss, who knows what it will be when the company reports next week. You have to see what these companies really earn...I think that's going to be the most disturbing part of next week's results...The fundamentals for the group are so bad not only in flat yield curve environment, but in investment banking...the fundamentals are lousy."
That's about as downbeat as you can get and it's a far cry from the rosy predictions of those who claim that the JPMorgan naysayers are simply fearmongers. Additionally, Whitney's skepticism about the firm's ability to increase its book value is important as those recommending the shares often cite the stock's price relative to its book value as a reason to jump on board.
When you combine all of this with the distinct possibility that the firm is still holding onto a sizeable portion of the Whale trade (via the original super senior tranche bet, any remaining short positions in high yield, and the remnants of the IG9 long position), and the fact that the firm has chosen to forgo future revenue in order to window dress the current quarter's earnings via asset sales, and you have a stock that is nearly impossible to like. Short JPM or long JPM puts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.