There is one number that JPMorgan Chase apparently doesn’t want outsiders to know: the overall size of the derivatives bets that have led to large losses and much reputational damage for the bank.
Since May, JPMorgan executives have spent a lot of time discussing the troubled trades, which were executed in London by traders that worked for a unit of the bank called the chief investment office. In July, the bank said that losses on its botched trades had reached $5.8 billion and could grow.
Despite, or perhaps because of, the damage the bets have caused, the executives have been loath to put dollar amounts on the positions. By revealing them, investors would have been better informed of the risks the bank was taking, and more able to test the assertions of management that the situation was under control.
Anyone craving clear-cut numbers may have had hopes for the bank’s quarterly filing with the Securities and Exchange Commission, which came out Thursday. Sometimes companies reveal certain numbers in such filings to ensure they are in compliance with regulatory disclosure requirements. But, once again, the size of JPMorgan’s position in the bad bets was not broken out.
In fact, in the second quarter filing, JPMorgan continued to use a disclosure practice that could prevent investors from detecting in the future whether the bank was pursuing the sort of derivatives strategy that got it into hot water. The disclosure issue revolves around hedges, or the trades banks make to offset potential losses elsewhere in the bank.
When JPMorgan first started to talk about the botched trades — some of which are still open positions they are trying to unwind — the bank said that they had grown out of hedges aimed at protecting the bank against losses on the bank’s large bond portfolio. The problem is that these hedges did not appear in the voluminous disclosures that JPMorgan regularly makes about its hedges. If they had appeared there, the bank would almost certainly have had to quantify their size, as they do with other hedges.
Instead, for some reason, JPMorgan combined its holdings in the botched trades with client-related positions. This made it impossible for outsiders to track whether JPMorgan was scaling up the size of its hedges in an ill-advised manner. They still can’t. The second-quarter filing still says the bets in question were mixed in with “market-making” derivatives.
Outsiders can try to make guesses based on the movements of the aggregated trade numbers. These numbers split out two categories of credit bet: a bullish type that makes money if the market thinks companies and countries are getting more creditworthy, and a bearish type that makes money when the opposite happens. JPMorgan started piling on far more bullish than bearish trades earlier this year. It had $65 billion more bullish than bearish credit bets at the end of 2011.
The London traders then stepped up their aggressive strategy. At the close of the first quarter, its bullish trades ended up being $148 billion in excess of the bearish ones. Then, as JPMorgan tried to deal with the controversy and the losses, it appears to have dumped nearly $142 billion of bullish bets, leaving them just $10 billion in excess of the bearish ones.
The need to be able to see hedges also has increasing regulatory importance. The Volcker Rule, which aims to stop banks from trading speculatively for themselves, allows banks to do trades if they are for hedging. Presumably, JPMorgan is now telling its regulators which of its credit derivatives are hedges and which aren’t. If the bank isn’t, it’s a scandal, but if it is, there is no reason investors should not also be party to such information.
Of course, JPMorgan isn’t likely to pile up large speculative derivatives positions any time soon. But investors should be able to check for themselves whether a bank has truly changed its ways. Despite everything, they still can’t with JPMorgan.