The Info Underground

14 July 2012
How Jamie Dimon and 'Flexible Accounting' Hid JPM's London Whale Loss

Quote"I am making an enemy here when I say something like this, but the Fed should replace Jaime Dimon. They should replace him for utter failure of corporate governance and telling the truth too slowly."

    Janet Tavakoli

As I said when the results came out before I even looked at the numbers, JPM raided their loss reserves in order to make a great deal of the London Whale loss go away and report there forecast earnings number to the penny.

They also made some fairly expansive assumptions in order to bridge the gap.

    CNN/Fortune
   How Jamie Dimon hid the $6 billion loss
    By Stephen Gandel, senior editor
    July 13, 2012

    A mixture of accounting moves and rosy assumptions appear to have masked JPMorgan's London Whale loss.


    FORTUNE -- Here is perhaps the most amazing thing about JPMorgan Chase's (JPM) $5.8 billion trading loss: Take a look at the firm's overall results, and it's like the London Whale's misstep, one of the largest flubs in the history of Wall Street, never happened.

    Back in mid-April, about two weeks before talk of the trading losses emerged, JPMorgan was expected to earn $1.21 a share in its second quarter. On Friday, JPMorgan reported that it had, Whale and all, earned exactly that.

    How the bank appears to have offset the huge trading loss is a prime example of how complex and malleable bank profits actually are, and how much they should be believed. JPMorgan's quarter should give fodder for accountants to talk about for some time.

    "Yes, I have seen these results, but I have also seen how the sausage is made and I am worried that I might get food poisoning in the future," Mike Mayo of Credit Agricole Securities and author of the book Exile on Wall Street told Dimon in a meeting with analysts following the bank's earnings release.

    Sure some of JPMorgan's businesses were strong. Profits in its mortgage operations, helped by falling interest rates, rose by nearly $1.3 billion. But a good deal of JPMorgan's earnings came from some shifting of losses and an assumption that things for the bank, and the economy in general, are about to get a good deal better. That assumption might prove right, but it could also add to losses in the future.

    So how do you make a nearly $6 billion loss go away?

    First stop taxes. The bank said that the London Whale's blunder cost the bank $4.4 billion in the second quarter alone. But that's before taxes. After it pays taxes, though, JPMorgan says the loss will shrink to just over $2.7 billion, which means the bank plans to take a $1.7 billion write off from Uncle Sam. Like any loss, banks are allowed to use trading blunders to offset taxable profits elsewhere in the bank. The question is the rate. At $1.7 billion, JPMorgan is writing off roughly 38% of the loss. That's not that out of line with the U.S. corporate tax rate, but it's a far larger percentage of profits than most companies actually pay. Nonetheless, on taxes alone, the bank was able to shrink the London Whale's wake to $4.1 billion.

    We haven't left the firm's vaunted chief investment office yet. CEO Jamie Dimon has long said the portfolio is safe and that if he were to liquidate it today he could produce an $8 billion gain for the bank. In the second quarter, he dipped into some of that. London Whale aside, the CIO took a $630 million gain. Now we're down to $3.5 billion.

    Next stop loan losses. Banks have to put money away for loans they believe are going to go bad. But banks can lower their expenses by putting away less money for future loan losses. In the second quarter, the bank put away just over $200 million for future loan losses. That was not only the lowest amount the bank had set aside in any three month period since the start of the financial crisis, it was the lowest by far. A year ago, the loan loss provision was $1.8 billion.

    What's more, not only did the bank put away less money for future loans, it also pulled back money it had put away in the past. And any money you take out of your loan loss reserves the accountants let you send right to your bottom line. It appears $1.3 billion, or about 28% of the company's total second quarter profit, came from this move, which is again only real earnings to accountants....

    http://finance.fortune.cnn.com/2012/07/ ... don-whale/ (http://finance.fortune.cnn.com/2012/07/13/jpmorgan-hid-london-whale/)

Posted 2012-07-13 09:34
by Karl Denninger

JP Morgan: Fraud Is Fraud, Where Are The Indictments?
 

From the JP Morgan earnings release this morning:

    JPMorgan said today that it recently discovered information that suggests some individuals at the company may have been trying to avoid showing the full amount of the losses. All employees working on synthetic credit derivatives in the CIO have left the bank, the company said today.

Evidence of fraud within a bank is not just a fireable offense.  It is also evidence of a criminal offense which must be investigated and acted upon.

Intentionally reporting bad marks isn't something that one should brush under the rug.  In addition it is clear that Jamie Dimon exercised insufficient oversight of an office that reported directly to him.

As Janet Tavakoli has opined today, and I agree, under any reasonable standard Jamie Dimon must be fired.

Further, it appears that a material mis-statement of results occurred and one thus cannot trust the former accounting statements until and unless they are gone through with a fine-toothed comb.

I know Dimon is somewhat of a "golden boy" among both regulators and the "cognescenti", but that's immaterial here.  This is not a "rogue trader" who is three or four levels of management removed from the CEO's office -- it is literally a direct report that not only made "bad decisions" they appear to have attempted to intentionally hide the loss, and Dimon was directly responsible for supervision of that office and failed to exercise the appropriate level of oversight and diligence.

He must go.

(Never mind that it appears that investors think he'll not only keep his job, but the bank will be rewarded for effectively "getting away with it" -- the stock is up 3%.)

Disclosure: No position in JP Morgan.

http://market-ticker.org/akcs-www?post=208557 (http://market-ticker.org/akcs-www?post=208557)