cholmley

Is JP Morgan Too Big to Survive?

Well start with faint praise, at least you got past the notional amounts.

But honestly, you sound like a kid who thinks he is a lot smarter than he really is thinking you have noticed something that no-one else has.

You focus on the nearly two trillion dollars of GROSS market value and then ignore what the figures you yourself provide, it nets down to around 60 billion! The days of cherry picking are long gone ISDA has spent the last twenty years making sure that almost every country and counterparty has signed up to multilateral netting.

If you have evidence that says, for example all the receivables are from Goldman and all the payables are due to Citibank and there is no multilateral netting applied then please let us have it.

Otherwise please understand that there are many professionals out here who have done this for a living for longer than you have been alive and know what is at stake and know how to read risk.

If your reason for being short JPM is based on this analysis buy your stock back.

Five U.S. Banks Are Too Big to Exist

Mr Nielson,

And you sir completely misunderstand what the report is about, it is the fact that corporate America uses a handful of banks to hedge its derivative risks. Understandable since those 5 banks have most of the expertise.

The banks themselves will have dispersed that risk amongst themselves and counterparties worldwide, at least the market risk, and the straightforward credit risk is usually dealt with margining and haircut requirements, in extremis if a huge balance has built up they might use a form of CDS but since they are expensive that is highly unlikely. I repeat, the report is about the companies such as IBM not really about the size of the notionals on the bank's books which are old news and completely irrelevant no matter what multiple of world GDP they are.

Really not much to see and nothing in the report justifies what you have written here.

Five U.S. Banks Are Too Big to Exist

Is there absolutely no quality control at Seeking Alpha?

To use gross notional amounts to signify risk is an error akin to treating sales revenue as profit.

No analysis about what risks are being run, no split between market risk and counterparty risk, no idea what margining is required what haircuts demanded.

I've put detailed posts on this topic here before, if you care you can follow the links in my comments, somehow I doubt most people will because its easier just to be outraged and ignorant.

The Banking Sector Isn't Out of the Woods

And finally did you know that Seeking Alpha still hasn't got a contributor who knows the difference between gross and net exposure.

After a period of massive market dislocation it is obvious that gross contracts written in derivatives would rise, people are hedging their derivatives risk with, guess what, derivatives and by doing so reducing their net exposures.

Read my other comments if you care, otherwise its just the same old headline expressed as 'shock' and 'horror'.

A Summary of Q1 Bank Earnings: World, You Just Got Hustled

I would say most of the banks are now at fair value for this stage of the cycle and hopefully we will have had enough of the treating them as internet stocks.

If you want to gamble let me suggest you go to Vegas, they could sure use the cash.

And as it happens I know about at least three of your scenarios and there are very straightforward answers to them, but you go ahead keep betting on red when it keeps turning up black.

Follow The Money: A Guide to TARP

When the TARP money was handed out at least half the bankers present at the meeting said they would rather not have the money, Paulson told them there would be dire consequences if they did not accept it, it was essentially forced upon all the banks whether or not they needed or wanted it.

Derivatives: Gambling at Public Expense

Bruce,

Thanks for coming back, appreciated.

Yes there are still risks involved due to credit but again the notional outstandings still offer nothing in the way of understanding of where the net risks lie. A bank such as BoA is a big trading bank and is likely to have as many buys as sells with a counterparty like AIG, the notionals net down to very little and the mark to market even less (remember with derivatives no principal changes hands), however a smaller bank might just have one trade on with AIG and might be set to lose the whole mark to market on that one trade if AIG failed, a potential catastrophe.

Sure there are systemic risks but they affect different banks very differently, a bank such as JPM for example will have pretty sophisticated risk systems and will demand margin and mark to market calls for all its trading, a failure at AIG would not be great but wouldn't impact the bottom line all that much. The hypothetical smaller bank with far fewer trades but less taken in margin and greater exposure to one name would be in trouble.

The problems at Citi and BoA were less to do with derivatives per se but just bad investment decisions, holding too much junk masquerading as AAA.

There are certainly questions to be asked about the systemic risks involved but they are more to do with the size of risks taken rather than how they are expressed and how good risk systems in each bank are and all banks need to be able to answer those questions. However notional outstandings of derivatives are really just a red herring signifying nothing in of themselves.

JPMorgan: New Day, New Bank, Same Story

nobby73,

Yes good comment, thats exactly how a diversified financial services firm is meant to work, blow the trading results out of the water when the markets are volatile and it seems the world is coming to an end and when the world returns to normal(ish) make money on traditional businesses such as credit cards and commercial loans having of course socked away billions in reserves thanks to those trading profits.

Of course you need a decent balance sheet to do this which is why it works for JPM and not so much for the others...

Derivatives: Gambling at Public Expense

Not again, again.

Look try this on for size, it is simple enough that you might understand it.

Suppose a customer, yes a real customer, say IBM wants to hedge its interest rate exposure for 10 years and calls up Goldman Sachs and asks them a ten year interest rate swap in 500 million dollars. Goldman Sachs does the trade and does not want 500 million sitting on its books so it goes to Bank Of America to hedge its new risk, BoA then trades with GS in another 500 million to cover GS' risk but now has its own risk.

Now lets say it cover its 500 million risk with an equivalent exposure in US ten year note futures, BOA sells them to someone who has funds to invest, so at this stage we have a notional exposure of 2 billion USD in interest rate swaps and 1 billion of US Treasuries, the initial 500 million IBM wanted to hedge has turned into a notional exposure of 3 billion, YET THE RISK TO THE PARTIES INVOLVED HAS GONE DOWN!

Certainly there are still residual risks involved, basis between Swaps and Notes for example, and credit implications, but only on the net positions, but the one thing you can draw absolutely no inference from is the notional value of the outstandings. A company with 500 million unhedged is far more exposed than a company with a trillion which is hedged for rates exposures and netting agreements.

That is not to say all is well, but without drilling down into the positions you are being alarmist for its own sake.

The Whitney Ratings

You guys keep on banging on about derivative exposure yet have no clue what you are talking about.

A large market making bank will have gross positions in the trillions as every trade is counted in those ridiculous numbers quoted above, but the net positions are extremely small.

Lets just give you one example, say Citibank trades an Interest Rate Swaps with Goldman Sachs in the amount of 500 million for 10 years on Monday then reverses the trade using the same counterparty the very next day, that notional of 1 billion will stay on the books for 10 years yet there is only the difference between the rates traded at risk, multiply that by 250 trading days across different products different currencies and different locations and the trillions are reached effortlessly.

Banks have risk managers and auditors they are not about to open their trading books to the public, the problems have not come about because of derivatives per se but large unhedged portfolios and banks with managers who were just ignorant of the true nature of the products they held.

Find a bank with good strong management and do not get distracted by notional amounts, look for the net exposures.

Derivatives: Just One Reason to Short the Banks

Pathetic ignorance.

It is not the gross value of the derivatives book but the net positions between counterparties that is relevant, do you know what these are, do you have any idea whatsoever what these are?

In any trading book there are billions of notional outstanding that can net down to almost zero with most trades being between a handful, yes five or less, counterparties.

A big market-making bank is actually likely to have a far smaller net exposure than a small one like say, oh Lehman or Bear Stearns.

If that is your reason for being short get out of your position.

How Was March a Bad Month?

Good god people get your head out of the sand. There is more than one market in the world, US equities are irrelevant for most of the trading banks are involved in.

They are deliberately getting the shorts excited, do not bet against the banks this quarter.