JPM

[wescobrk]

I just lost my last post so this will be shorter. I'm trying to figure out why JPM is trading at 8x current earnings and 6.5 next year and trading less than tangible book while it has earned 15% return on tangible book past few years also I understand wells has less risk but I dont understand why it deserves a forward multiple at twice the level of JPM.

Does anyone here have a strong argument why JPM should trade at this level besides the CIO division is a permanant concern and not transitory?

Thanks

[Kraven]

Seems like to some extent you answered your own questions.  However, I would add that stating matter of factly that WFC has less risk than JPM, looking at it holistically, demonstrates a lack of understanding about banking and pricing.

[twacowfca]

Seems like to some extent you answered your own questions.  However, I would add that stating matter of factly that WFC has less risk than JPM, looking at it holistically, demonstrates a lack of understanding about banking and pricing.

 

I disagree.  JPM is one of the banks that was apparently making fraudulent submissions for setting Libor.  Libor is the basis for untold trillion $$ of transactions and contracts.  The potential liability for a US bank is mind boggling.

[bmichaud]

Some good comments here on why this LIBOR scandal is a touch excessive....

 

http://pragcap.com/why-is-no-one-freaking-out-about-the-libor-scandal

 

 

[alpha231616967560]

Some good comments here on why this LIBOR scandal is a touch excessive....

 

http://pragcap.com/why-is-no-one-freaking-out-about-the-libor-scandal

 

I think that the author is understating the potential here. If JPM (or any of the other banks such as C) is proven to have manipulated LIBOR, it will likely mean at least some significant legal expenses for them. Proving civil liability is another beast altogether, but as a shareholder, I certainly don't feel comfortable with the wave of the hand treatment that this author seems to give this matter.

[bmichaud]

As the author points out, if the banks are truly manipulating, they are doing a horrendous job, as it is almost 100% correlated with the Fed Funds Rate. Given that it has remained highly correlated with the FFR, where is the liability? Did those borrowing at LIBOR + X% lose money?

 

We just went through the biggest financial crisis since the Great Depression that involved untold numbers of "sketchy" transactions by the big banks that led to untold numbers of losses by MBS holders....yet liabilities have been minimal in the grand scheme of things.

[JSArbitrage]

As the author points out, if the banks are truly manipulating, they are doing a horrendous job. Given that it has remained highly correlated with the FFR, where is the liability? Did those borrowing at LIBOR + X% lose money?

 

Just an FYI, barely manipulating something isn't some legal threshold that bestows immunity.  And it's funny you said "if banks...," What? Is your browser broken? Can't read the emails yourself?  Don't trust the Bank of England's own testimony?

[alpha231616967560]

As the author points out, if the banks are truly manipulating, they are doing a horrendous job, as it is almost 100% correlated with the Fed Funds Rate. Given that it has remained highly correlated with the FFR, where is the liability? Did those borrowing at LIBOR + X% lose money?

 

I can't claim to imagine clearly what the total liabilities could be, but when you consider that LIBOR is the most widely used reference rate for short term loans, and that there is about $1T in student loans alone out there, even one fudged basis point is going to have a significant impact and invite class action suits. The possibilities are...well, hard to fathom.

[Rabbitisrich]

Something is clearly funky, but it US banks aren't necessarily at huge risk. Quantifying exact damages will be a problem. Look at daily 3 month libor in USD compared to 3 month AA commercial paper (fin + non-fin, it doesn't make a huge difference) and to effective fed funds. It matches pretty closely. Because banks lend to each other in various ways, it would be difficult to lock down one ask and say that's the "real" LIBOR.

[writser]

What I think: the LIBOR scandal is just the hype of the week, with massive media coverage because 1) it's a nice and easy subject, as opposed to the euro-crisis or US debt situation and 2) everybody currently likes to point to the bankers as the source of all evil in this world. The journalists scoop some nice articles, Joe Sixpack can complain about Wall Street, maybe the process of determining LIBOR will be adjusted and the banks will settle all lawsuits.  It will mean nothing for the long-term earning power of these banks and in a few years everybody has forgotten about this. I can't imagine WEB being worried about this, he'd probably see it as a buying opportunity instead.

[Myth465]

As the author points out, if the banks are truly manipulating, they are doing a horrendous job. Given that it has remained highly correlated with the FFR, where is the liability? Did those borrowing at LIBOR + X% lose money?

 

Just an FYI, barely manipulating something isn't some legal threshold that bestows immunity.  And it's funny you said "if banks...," What? Is your browser broken? Can't read the emails yourself?  Don't trust the Bank of England's own testimony?

 

LOL you read my mind....

[Kraven]

Something is clearly funky, but it US banks aren't necessarily at huge risk. Quantifying exact damages will be a problem. Look at daily 3 month libor in USD compared to 3 month AA commercial paper (fin + non-fin, it doesn't make a huge difference) and to effective fed funds. It matches pretty closely. Because banks lend to each other in various ways, it would be difficult to lock down one ask and say that's the "real" LIBOR.

 

This is a good point.  I don't pretend to understand the issues involved here on a granular basis.  However, while this indeed seems to be some kind of scandal, I am struggling to figure out exactly what the repurcussions are going to be.  Damages are going to be immensely hard to prove given that any one bank doesn't control anything.  So unless there is a conspiracy of the kind that Robert Ludlum (or back in the day, Paul Erdman) used to write about, I am not sure what is going to happen here.

 

Clearly if "bad acts" were done, there will be a penalty for that.  It will be more than a wrist slap, but given the difficulty in proving exactly what the "bad acts" caused, I fail to see how there can be anything more than substantial fines and a head or 2 from each bank at fault on a platter.  It's kind of like the old Steven Wright joke about how his house got broken into and everything was replaced with exact replicas.  So yes, there is a bad act, but what are the damages?  Without a way to quantify it, and I don't see how there is, there will likely be a lot of noise, some fines, and this scandal will join the others in the history books.

[ubuy2wron]

This thread is about Libor manipulation not JPM unless of course JPM was involved in Libor manipulation. If this spreads to more than Barclays then hopefully we will see similar board action(firing of top people) also hopefully we will see large fines and hopefully we will see some top people go to jail also hopefully it will end there I do not want to see a never ending stream of heyena like class action law suits.

[twacowfca]

I dont't think the Libor manipulation can be dismissed as a minor problem that is merely deserving of a fine.  Testimony taken by the Bank of England indicates that traders for six big banks, including JPM and BAC regularly called each other to compare what they intended to report, including remarks questioning whether the rates some banks intended to report should be lowered.

 

The fraudulent reporting during the financial crisis when the true interbank rates were going crazy may not have been merely a few basis points.

[twacowfca]

Something is clearly funky, but it US banks aren't necessarily at huge risk. Quantifying exact damages will be a problem. Look at daily 3 month libor in USD compared to 3 month AA commercial paper (fin + non-fin, it doesn't make a huge difference) and to effective fed funds. It matches pretty closely. Because banks lend to each other in various ways, it would be difficult to lock down one ask and say that's the "real" LIBOR.

 

The mechanism for setting Libor was intended to be entirely truthful and objective, something that lenders and borrowers could rely on.  It was intended to replace the many various 'prime rates' that were not reliable indicators for establishing the basis for true rates.

 

Manipulating a rate that is relied on throughout world finance as objective and truthful is about as serious as it gets.

 

Libor influences most commercial rates including those that don't specify that Libor is the basis.

[Kraven]

I dont't think the Libor manipulation can be dismissed as a minor problem that is merely deserving of a fine.  Testimony taken by the Bank of England indicates that traders for six big banks, including JPM and BAC regularly called each other to compare what they intended to report, including remarks questioning whether the rates some banks intended to report should be lowered.

 

The fraudulent reporting during the financial crisis when the true interbank rates were going crazy may not have been merely a few basis points.

 

You seem to have put some thought into this issue.  So what do you think the damages are?  How would one calculate it?  If the amounts have tracked fed funds, etc what is the real harm done?  I am not being sarcastic.  There are some smart people on this board.  Perhaps we can attempt to figure out what the potential repurcussions might be to the banks.  The fact that it's such an opaque issue that just strikes at our notions of fairness and operation of the financial system, but without anything really to grasp on to is what leads me to believe there will be heavy fines, some heads and not much else. 

 

I guess there could be some criminal sanctions, but it will be hard to pin that on the banks I would think as opposed to individuals within.  A criminal violation by the bank itself could be the death penalty - see Drexel for a cautionary tale.  I truly find it hard to believe though that just barely coming out of the worst financial crisis since the Great Depression any government, no matter how much bluster, is going to push a major bank in that way.  That could cause issues of a whole different magnitude.  So I stand by my prediction - heavy fines and a few heads.  But I am curious as to what others think.

[Aberhound]

The top and bottom 25% of the LIBOR submissions are discarded so perhaps the legal strategy of Barclays was to report at the top and JPM to report from the bottom so it is difficult to prove that there action cause damages short of proving conspiracy.

 

The greater danger is that the losers on derivative bets refuse to pay while the winners collect. Will JPM be willing to sue and risk a counterclaim of conspiracy to distort LIBOR and punitive damages? This will be brutal litigation with endless discoveries. Does JPM want to disclose all of their trader's emails now that evidence of traders' collusion has surfaced?

 

Will lenders continue to lend to JPM at low rates until the outcome of the litigation is known? Why would they when they can lend to WFC with much less exposure.

[PlanMaestro]

Regulators can leak too

http://dealbook.nytimes.com/2012/07/11/shake-up-at-new-york-fed-is-said-to-cloud-view-of-jpmorgans-risk/

 

In 2008, the agency’s examiners inside JPMorgan raised broad concerns about the bank’s internal stress test models, according to the current and former officials. The examiners said that they were worried that the bank’s analysis incorrectly calculated the potential effect on various businesses from a variety of conditions, including large market swings and sudden fluctuations in interest rates.

 

One report, for example, estimated that the bank’s chief investment office would lose no more than $400 million in a two-week period even under the most stressful market conditions, one of the government officials said.

 

Some of the agency’s examiners said they had battled to get senior executives at JPMorgan to share how the bank’s internal stress tests were structured. One of the former officials described the analysis as a virtual black box, in which the bank provided few details about the variables.

 

JPMorgan executives resisted providing any additional information about the stress tests, including how they chose the variables used to forecast potential losses. The bank routinely pushed back scheduled meetings to review the matter, the current and former officials said.

 

“We were most concerned with the fact that the stress test is one of the most important risk management reports,” said one of the former bank examiners, and the test’s methodology “had not been reviewed by regulators.”

 

Compounding their frustrations, Joseph Bonocore, the bank’s treasurer, left in October 2011. In the ensuing months, some of the examiners said they had less access to information about the bank.

 

That same year, the New York Fed was retooling its team at JPMorgan. The Fed saw an opportunity to rethink the way it policed the industry. It hired a new head of bank supervision, added staff with greater financial expertise and revamped the roster of examiners stationed at the banks.

 

But the transition came at a critical time for JPMorgan. In 2011, the once little-known chief investment office was swelling in size and taking on increasingly risky bets. By early 2012, the Office of the Comptroller of the Currency conducted a review of JPMorgan’s stress test models, months before reports emerged about potential losses in the chief investment office, according to the current and former officials. The examination revealed that the models needed upgrades.

 

At one point in the first quarter of this year, some of the examiners said that JPMorgan had simply stopped providing them with some metrics from the chief investment office. When they asked why the crucial value-at-risk measure had disappeared, executives did not give them a satisfying answer.

 

Around that time, the bank changed the value-at-risk measure for the chief investment office, which they did not disclose publicly for months. The switch would prove important. By changing the metric, the bank could seemingly take on more risk. It all came to a head in May when the bank announced a $2 billion trading loss on a soured credit bet. Since then, losses have multiplied to an expected $5 billion in the second quarter, a tally that could grow.

[WarrenWatsa]

Mr. B compares JPM London Whale Scandal to the Salad Oil Scandal:

 

"...and we made a ton of money on that..."

 

Says it all, folks.

 

In my humble opinion, there has been too much discussion in this thread about a controllable problem that will soon pass and not enough discussion on just how fortunate we are to see a stock with the value of JPM trade back down to near $30/share.

[Uccmal]

Yep... Says it all.  I loaded up 2014s and common in the 33-35 range.  Unfortunately with BAC and AIG even cheaper it was hard to raise much cash. 

[PlanMaestro]

Why oh why has he decided to be such an unfiltered spokesman. It is not like he HAS to do it: his job is not on the line and the bonus would not be make such a difference in his life… and he used to be such an example.

 

http://money.cnn.com/2012/10/10/news/economy/jamie-dimon-washington/index.html

[Parsad]

Why oh why has he decided to be such an unfiltered spokesman. It is not like he HAS to do it: his job is on the line and the bonus would not be make such a difference in his life… and he used to be such an example.

 

http://money.cnn.com/2012/10/10/news/economy/jamie-dimon-washington/index.html

 

Although, you've got to love this quote:

 

"It was a stupid error, but it wasn't going to sink our ship," he said. "Only when I come to Washington do people act like making a mistake should never happen. Of course it happens."

 

Cheers!

[MrB]

55min with Jamie

 

http://www.youtube.com/embed/TU5P5ufZQdk

[PlanMaestro]

The Truth About Dishonesty

http://www.farnamstreetblog.com/2012/10/the-truth-about-dishonesty/

 

55min with Jamie

[racemize]

The Truth About Dishonesty

http://www.farnamstreetblog.com/2012/10/the-truth-about-dishonesty/

 

55min with Jamie

 

great video.  I love the RSA animations.