The Fail Whale trade is a bit complicated in it’s details, but basically JPMorgan Chase was selling insurance against a basket of corporate bonds that made up a fairly regularly (as these things go) traded index (like the Dow, but not the same companies and not common stock) and was supposedly hedging these bets with actual positions in the underlying assets and making money off the spread between the price for the insurance and the cost of the bonds.

Esoteric but perfectly sound and legal (under today’s laws).

The problem was that in order to manipulate the much smaller market for the insurance and increase the spread by simulating demand (sockpuppets), JPMorgan Chase ended up in a position where it was net bearish on the bonds (i.e. betting there would be a default so it could collect the insurance from itself) thereby increasing its need to obtain bonds in the regular market that it did not totally control in order to offset potential losses should the bonds in fact do better than expected and rise in price.

And then the wolves came in.

You can’t throw large chunks of money around a small casino without somebody noticing and a lot of regular players saw the increase in demand for bonds and started buying them up, raising the price even more and making JPMorgan Chase’s insurance nearly worthless.

Now on the money losing end of the trade JPMorgan Chase tried unwinding it, selling their sockpuppet positions in the insurance for pennies on the dollar and liquidating their hedge assets at what they thought was the top of the underlying market.

Only the wolves were there first and valuations dropped like a stone to their normal equilibrium and JPMorgan Chase ended up with an approximately $6.5 BILLION loss.

Yay for our side. Way to stick it to the man.

But wait, there’s more.

The funds JPMorgan Chase used were taxpayer insured depositor’s accounts, which is illegal. Manipulating markets using sockpuppets is illegal.

AND to cover up these crimes JPMorgan Chase started issuing fraudulent statements to Government Regulators, which is illegal; AND TO ITS VERY OWN STOCKHOLDERS AND INVESTORS, which is illegal.

And Jamie Dimon knew all about it and lied to Congress, which is illegal.

Will anyone go to jail? Who’s naive now Kay?

Senate investigation finds JP Morgan hid mistakes as trade losses grew

Heidi Moore, The Guardian

Friday 15 March 2013 04.38 EDT

JP Morgan’s $6.2bn London Whale trading debacle was born out of secretive trades and creative bookkeeping as the bank attempted to limit losses using a practice that one regulator called “make believe voodoo magic”, a Senate investigation has concluded.

The report by the Senate subcommittee on investigations, published on Thursday, detailed a series of failures in which accounts were hidden and trades were valued incorrectly to minimize losses. It also alleged that regulators were kept in the dark, a head trader’s concerns went unheeded and a $51bn trading portfolio ballooned to $157bn in three months.

…

The report also concludes that JP Morgan CEO Jamie Dimon, whose bonus was cut in half to $11.5m last year, knew about the sustained trading losses when he dismissed the incident as a “tempest in a teapot” in April 2012.

…

The investigation paints a picture of a growing debacle that started with the bank’s attempt to reduce the risk of its trades so that it would have a stronger capital cushion and look powerful to regulators. It started with the overconfidence of traders after a lucky bet made about $400m on the bankruptcy of American Airlines. Drew applauded the traders.

They suffered from that overconfidence when they bet incorrectly on the bankruptcy of Eastman Kodak in January 2012. That kicked off nine straight days of trading losses that cost the bank at least around $50 million. One trader in the CIO told the Senate committee that “they were told not to let an Eastman Kodak-type loss happen again.” As the traders scrambled to keep the trades – which were designed to benefit if there was a financial crisis – they found that the improving bond market worked against them. Between January and March 2012, it didn’t have one profitable day in its CIO portfolio, according to the report.

JPMorgan Chase CEO Jamie Dimon is accused of hiding information about big losses

By Danielle Douglas, Washington Post

Mar 15, 2013 12:59 AM EDT

Washington dealt a double blow Thursday to JPMorgan Chase as a Senate report accused its iconic chief executive of hiding information about a massive loss from regulators while the Federal Reserve unexpectedly said it had found a “weakness” in the bank’s capital plans.

The twin announcements, both unveiled in the late afternoon, escalates the problems for JPMorgan, the nation’s largest bank and arguably its most prestigious. Once viewed as the strongest bank to emerge from the 2008 financial crisis, the firm on Thursday watched its weaker rivals, Bank of America and Citigroup, sail through the Fed’s examination.

…

The Senate report is the first to suggest that JPMorgan’s chief executive Jamie Dimon was less than forthright with regulators as he learned of the mounting losses. To date, Dimon has acknowledged that the bank failed to manage its risks, which allowed the bad trades to persist.

The report takes the bank to task for hiding losses for three months last year, overstating the value of its trading positions and ignoring red flags. When regulators grew concerned, JPMorgan withheld information about the nature of the portfolio, Senate investigators say.

JPMorgan Report Piles Pressure on Dimon in Too-Big Debate

By Dawn Kopecki, Clea Benson & Hugh Son, Bloomberg News

Mar 15, 2013 10:05 AM ET

JPMorgan Chase & Co. (JPM)’s efforts to hide trading losses, outlined in a Senate report yesterday, probably will ignite debate over whether the largest U.S. bank is too big to manage and ratchet up pressure on Chief Executive Officer Jamie Dimon to surrender his role as chairman.

Dimon misled investors and dodged regulators as losses escalated on a “monstrous” derivatives bet, according to a 301-page report by the Senate Permanent Subcommittee on Investigations. The bank “mischaracterized high-risk trading as hedging,” and withheld key information from its primary regulator, sometimes at Dimon’s behest, investigators found. Managers manipulated risk models and pressured traders to overvalue their positions in an effort to hide growing losses.

…

The Senate report cited Bloomberg stories published last year disclosing that Dimon, 57, had transformed the CIO in the past five years from a conservative investment operation into a much larger, high-risk trading profit center, and that he exempted the office from rigorous scrutiny.

…

JPMorgan’s credit portfolio more than tripled from a net notional size of $51 billion in late 2011 to $157 billion by the time trading was shut down in late March of last year, the report says. Iksil acquired more than $80 billion, or about 50 percent, of a thinly traded credit index, which made it difficult to find buyers, according to the subcommittee.

…

Iksil’s book breached all five of the CIO’s internal risk measures, and with increasing frequency from January through April, totaling more than 330 violations, the report said. Instead of investigating the cause or reducing its danger, traders, risk managers and executives criticized the metrics as inaccurate and “pushed for model changes that would portray credit derivative trading activities as less risky,” the report said.

On Jan. 30, 2012, the bank began using a new formula for so-called value at risk that cut Iksil’s estimated possible losses by about half. He had breached the limit under the prior model.

“The new VaR model not only ended the SCP’s breach, but also freed the CIO traders to add tens of billions of dollars in new credit derivatives to the SCP which, despite the supposedly lowered risk, led to additional massive losses,” the report said, referring to the synthetic credit portfolio. That model was later scrapped.

…

JPMorgan misled the public by hiding losses, mismarking trades, withholding information from the Office of the Comptroller of the Currency and “lying to investigators by saying that JPMorgan was fully transparent to regulators regarding the mounting losses when it was not,” (Senator John) McCain told reporters at a press briefing.

…

“None of those statements made on April 13 to the public, to investors, to analysts were true,” (Senator Carl) Levin said. “The bank also neglected to disclose on that day that the portfolio had massive positions that were hard to exit, that they were violating in massive numbers key risk limits.”

…

Statements and regulatory filings by the bank “raise questions about the timeliness, completeness and accuracy of information” given to investors, the committee said in a section on securities laws and their requirements about disclosing information. The Securities and Exchange Commission has been conducting its own investigation of the bank’s losses.

The evidence suggests the bank “initially mischaracterized or omitted mention” of the portfolio’s problems partly because it “likely understood the market would move against it if even more of those facts were known,” the report says.

(h/t Susie Madrak @ Crooks & Liars)

Live-Blogging Senate Hearing Tomorrow, When J.P. Morgan Chase Will Be Torn a New One

Matt Taibbi, Rolling Stone

POSTED: March 14, 5:00 PM ET

Why should we care if a private bank, or more to the point a private banker like Chase CEO Jamie Dimon, loses a few billion here and there? What business is it of ours? And why did we have to have congressional hearings about it last year?

…

What the report describes is an epic breakdown in the supervision of so-called “Too Big to Fail” banks.

…

If the information in the report is correct, Chase followed the behavioral model of every corrupt/failing hedge fund this side of Bernie Madoff and Sam Israel, only it did it on a much more enormous scale and did it with federally-insured deposits. The fund used (in part) federally-insured money to create, in essence, a kind of super high-risk hedge fund that gambled on credit derivatives, and just like Sam Israel did with his Bayou fund, when it got in trouble, it resorted to fudging its numbers in order to disguise the fact that it was losing money hand over fist.

Chase for years hid the very existence of this operation from banking regulators and lied about the purpose of the fund (saying it was purely a hedging operation when it stopped being a hedge and instead became a wild directional gamble), and it also changed the way it calculated the fund’s value once it started to lose hundreds of millions of dollars. Even worse, the bank’s own internal auditors signed off on the phoney-baloney accounting of this Synthetic Credit Portfolio (SCP), at one point allowing it to claim $719 million in losses when the real number was closer to $1.2 billion.

How did they do this? In the years leading up to January of 2012, Chase used a standard, plain-vanilla method to price the derivative instruments in its portfolio. The method was known as “mid-market pricing”: if on any given day you had a range of offers for a certain instrument – the “bid-ask” range – “mid-market pricing” just meant splitting the difference and calling the value the numerical middle in that range.

But in the beginning of 2012, Chase started to lose lots of money on the derivatives in its SCP, and just decided to change its valuations, that they weren’t in the business of doing “mids” anymore.

…

If you can fight through the jargon, what this basically means is that Chase decided to go into the fiction business and invent a new way to value its crazy-ass derivative bets, using, among other things, a computerized model the company designed itself called “P&L predict” which subjectively calculated the value of the entire fund toward the end of every business day.

If this all sounds familiar, it’s because it’s the same story we’ve heard over and over again in the financial-scandal era, from Enron to WorldCom to Lehman Brothers – when the going gets tough, and huge companies start to lose money, they change their own accounting methodologies to hide their screw-ups, passing the buck over and over again until the mess explodes into the public’s lap.

Mar 20 2013

Things that make me spitting mad.

By ek hornbeck

Emily and Richard think watching MSNBC and Current make them “liberal”.

Read my blogs? Nobody ever does. Why should I expect more? And Brookings? Heh.

Very Serious == Constantly Wrong and unpunished for it.

Mar 20 2013

On This Day In History March 20

By TMC in News

Cross posted from The Stars Hollow Gazette

This is your morning Open Thread. Pour your favorite beverage and review the past and comment on the future.

Find the past “On This Day in History” here.

March 20 is the 79th day of the year (80th in leap years) in the Gregorian calendar. There are 286 days remaining until the end of the year.

March 20th is also the usual date of the vernal equinox in the Northern Hemisphere, and the autumnal equinox in the Southern Hemisphere when both day and night are of equal length, therefore it is frequently the date of traditional Iranian holiday Norouz in many countries.

On this day in 1854, Republican Party is founded in Ripon Wisconsin.

The Republican Party emerged in 1854, growing out of a coalition of former Whigs and Free Soil Democrats who mobilized in opposition to the possibility of slavery extending into the new western territories. The new party put forward a vision of modernizing the United States-emphasizing free homesteads to farmers (“free soil”), banking, railroads, and industry. They vigorously argued that free-market labor was superior to slavery and the very foundation of civic virtue and true republicanism, this is the “Free Soil, Free Labor, Free Men” ideology. The Republicans absorbed the previous traditions of its members, most of whom had been Whigs; others had been Democrats or members of third parties (especially the Free Soil Party and the American Party or Know Nothings). Many Democrats who joined up were rewarded with governorships. or seats in the U.S. Senate or House of Representatives. Since its inception, its chief opposition has been the Democratic Party, but the amount of flow back and forth of prominent politicians between the two parties was quite high from 1854 to 1896.

Two small cities of the Yankee diaspora, Ripon, Wisconsin and Jackson, Michigan, claim to be the birthplace of the Republican Party (in other words, meetings held there were some of the first 1854 anti-Nebraska assemblies to call themselves by the name “Republican”). Ripon held the first county convention on March 20, 1854. Jackson held the first statewide convention on July 6, 1854; it declared their new party opposed to the expansion of slavery into new territories and selected a state-wide slate of candidates. The Midwest took the lead in forming state party tickets, while the eastern states lagged a year or so. There were no efforts to organize the party in the South, apart from a few areas adjacent to free states. The party initially had its base in the Northeast and Midwest. The party launched its first national convention in Pittsburgh, Pennsylvania, in February 1856, with its first national nominating convention held in the summer in Philadelphia, Pennsylvania.

John C. Fremont ran as the first Republican nominee for President in 1856, using the political slogan: “Free soil, free labor, free speech, free men, Fremont.” Although Fremont’s bid was unsuccessful, the party showed a strong base. It dominated in New England, New York and the northern Midwest, and had a strong presence in the rest of the North. It had almost no support in the South, where it was roundly denounced in 1856-60 as a divisive force that threatened civil war.

Historians have explored the ethnocultural foundations of the party, along the line that ethnic and religious groups set the moral standards for their members, who then carried those standards into politics. The churches also provided social networks that politicians used to sign up voters. The pietistic churches emphasized the duty of the Christian to purge sin from society. Sin took many forms-alcoholism, polygamy and slavery became special targets for the Republicans. The Yankees, who dominated New England, much of upstate New York, and much of the upper Midwest were the strongest supporters of the new party. This was especially true for the pietistic Congregationalists and Presbyterians among them and (during the war), the Methodists, along with Scandinavian Lutherans. The Quakers were a small tight-knit group that was heavily Republican. The liturgical churches (Roman Catholic, Episcopal, German Lutheran), by contrast, largely rejected the moralism of the Republican Party; most of their adherents voted Democratic.

Mar 20 2013

Cartnoon

By ek hornbeck

The Larch.

Mar 20 2013

Muse in the Morning

By Robyn in Art, Community, Poetry

Muse in the Morning

Triple 29

Mar 20 2013

Late Night Karaoke

Late Night Karaoke

Mar 20 2013

Cyprus Stops EU Bank Robbery

By TMC in Politics

Cross posted from The Stars Hollow Gazette

The Cyprus Parliament has rejected the European Union’s bail out deal that would have imposed a hefty one time tax on all deposits to raise €5.8 billion of the total €10 billion bailout cost. The original terms of the bailout called for a one-time tax of 6.75 percent on deposits of less than €100,000, or $129,000, and a 9.9 percent tax on holdings of more than €100,000.

NICOSIA – The Cypriot Parliament on Tuesday overwhelmingly repudiated a €10 billion international bailout package that would have set an extraordinary precedent by taxing ordinary depositors to pay part of the bill. The lawmakers sent President Nicos Anastasiades back to the drawing board with international bailout negotiators to devise a new plan that would allow the country to receive a financial lifeline and avoid the specter of a devastating default that would reignite the euro crisis.

Lawmakers rejected the plan with 36 voting no and 19 abstaining arguing that it would be unacceptable to take money from account holders. Some in the opposition party even suggested abandoning a European Union bailout altogether and appealing to Russia or China to lend Cyprus the funds it needs to keep the economy and its banks afloat.

The deal was brokered last week with Cypriot President Nicos Anastasiades in a meeting at a European Union summit in Brussels. According to reports in The Guardian, the newly elected president was literally “sucker punched” by the International Monetary Fund, the European Commission, and the European Central Bank as it sought to broker a bailout for its ailing banks:

(..) (T)he centre-right Cypriot leader was given a 12-hour stay of execution until the early hours of Saturday on what, highly conveniently, was a Cyprus bank holiday weekend. He went home with a €10bn euro bailout and a eurozone taboo-busting obligation to expropriate every saver in every bank in Cyprus. [..]

It was not the two-day summit that decided to confiscate savers’ money for the first time in more than three years of currency, banking and sovereign debt crisis. Rather, the Dutch finance minister Jeroen Dijsselbloem called an emergency session of the eurogroup in the same drab building in Brussels to kick off on Friday just as the leaders were heading for the airport. [..]

The key players were Wolfgang Schaeuble, the German finance minister, his former deputy, Jörg Asmussen, from the ECB, Christine Lagarde of France for the IMF, and Finland’s Rehn from the commission.

Anastasiades lingered in the building, but did not take part in the meeting which began at 4.30pm on Friday and ended with a bombshell – under the terms of the bailout he would need to find €5.8bn by raiding bank accounts.

Needless to say the reaction of the Cypriots was predictable with attempts to withdraw as much cash from ATM’s which were quickly emptied over the weekend. The banks were ordered to keep the cash machines replenished even though the banks would remained closed until Thursday. There were worries in other EU member states that depositors would start pulling savings from accounts, particularly Italy, Spain and Greece where the economic conditions are still uncertain.

The market reactions on Monday were predictable, they fell. While the Asian market today was fairly stable on the plus side, the European market fell. On Wall Street, the S&P and NASDAQ fell while the DOW which was in the red most of the day had a late rally to end the day with a 0.03% gain, hardly impressive.

At Reuters, Felix Salmon presented an alternative solution that designed the godfather of sovereign debt restructuring by Lee Buchheit, “the godfather of sovereign debt restructuring,” and Mitu Gulati of Duke University, in a three page paper:

First, leave all deposits under €100,000 untouched. Hitting those deposits was by far the biggest mistake of the Cyprus plan as originally envisaged, and everybody would be extremely happy if guaranteed depositors could be kept whole.

Second, term out everybody else by five years, or ten if they prefer.

That’s it! That’s the whole plan, and it’s kinda genius. If you have bank deposits of more than €100,000, they will be converted into bank CDs, with a maturity of either five years or 10 years – your choice. If you pick the longer maturity, then your CD will be secured by future Cypriot gas revenues, which could amount to hundreds of billions of dollars.

And if you have sovereign bonds, they too will be termed out by five years, giving Cyprus a bit of breathing room to get its act together.

According the paper, this plan would reduce the size of the bailout by more that the €5.8 while not touching anyone’s principle. There would still be a “present value haircut” to accounts over €100,000 but that is going to happen in any bailout scenario.

Cyprus has long been a money stashing haven for Russian oligarchs who have over €20 billion in the banks, nearly one third of all deposits.

This was an unprecedented move by the EU to force regular depositors and, rightly, the outrage was justified, immediate and predicted. Even Paul Krugman was predicting bank runs. That question looms large:

if the taxpayers of the rich northern members of the eurozone are going to force a country that represents only 0.2% of the club’s GDP to part-finance their own bailout, will they be any more generous when it comes to some of the big-country members such as Italy and Spain that might be next in line? And in the event that the Italians and the Spanish get an inkling that a bailout is looming, won’t they immediately withdraw all their euros immediately, triggering a bank run?

The question now is what next? Will the Russians or Chinese come to the aid of Cyprus to protect their citizens deposits? Can they afford to? Will Cyprus withdraw from the EU and risk the failure of its banks? Can a tiny island nation of 1.1 million be the downfall of the euro?

Stand by, as events will happen very fast to avert a global monetary disaster.

Mar 20 2013

Just One Soldier . . . . . . as related to Chris Hedges!

By tahoebasha3

Chris Hedges visited a soldier in his home.

I flew to Kansas City last week to see Tomas Young. Young was paralyzed in Iraq in 2004. He is now receiving hospice care at his home. I knew him by reputation and the movie documentary “Body of War.” He was one of the first veterans to publicly oppose the war in Iraq. He fought as long and as hard as he could against the war that crippled him, until his physical deterioration caught up with him. . . .

This “telling of a soldier” is very sensitive and I think should simply be read without “pieces” so to speak.

Here, then is his (Chris’) article: “One of First Iraq Veterans to Publicly Oppose War Will Die for Our Sins” Monday, 11 March 2013 09:44 By Chris Hedges, Truthdig | Op-Ed

Chris’ article so gripped author, William River Pitts, that he responded in

“Waking From My Moral Coma,” Wednesday, 13 March 2013 09:07, Truthout | Op-Ed

In this article, Pitts questions his own moral fibre:

I’ve been having trouble with mirrors lately. When I look these days, I see a bastard staring back, a stranger, a guy who should be ashamed of himself.

He is.

A long, long time ago, I wrote this: “America is an idea, a dream. You can take away our cities, our roads, our crops, our armies, you can take all of that away, and the idea that is America will still be there, as pure and great as anything conceived by the human mind.”

I still believe that, and therein lies the problem. I am a sucker for that dream, that idea, and for the last few years I allowed it to seduce me. . .. .

But Pitts takes it much further from there:

and when I look in the mirror, I cannot meet my own eyes. I spent all those years fighting against everything that is ending Tomas Young’s life, I made documenting their serial crimes my life’s work…and then I let it slide, because Bush was gone, and I couldn’t summon the necessary energy to remain outraged over the fact that they all got away with the crime of the millennium scot-free.

It is enough.

I am finished with the moral geometry that says this is better than that, which makes this good. This is not good; this is, in fact, intolerable. Allowing the perpetrators of war crimes – widely televised ones at that – to retain their good name and go on Sunday talk shows as if they had anything to offer besides their ideology of murder and carnage is intolerable. Entertaining the idea that the billions we spend preparing for war cannot be touched, and so the elderly and the infirm and the young and the weak and the voiceless must pay the freight instead, is intolerable.

Read the rest of Pitts’ article ‘here’!

Every single American should be compelled to read the foregoing article by Chris Hedges, as well as William Rivers Pitt commenting on the article and himself.

Mar 20 2013

Today on The Stars Hollow Gazette

By TMC

Our regular featured content-

On This Day In History March 19 by TheMomCat
Punting the Pundit by TheMomCat

These featured articles-

A Troll and an Idiot by ek hornbeck
Wishful Thinking and Lies by ek hornbeck
JP Morgan’s Crime Spree by TheMomCat

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