JPMorgan (NYSE: JPM) Losses Keep Unraveling
The Financial Times reported that more than a dozen senior traders and credit experts know that JPMorgan is in a lot more trouble than just suffering $2.3 billion – and counting – in losses.
Turns out the unit at JPMorgan that's responsible for the loss has been the biggest buyer of European mortgage-backed bonds and other complex debt securities in all markets for three years.
Now JPMorgan has built up positions totaling $100 billion in the same risky financial products that triggered the financial crisis in 2008.
But anyone who followed Money Morning's Shah Gilani as he covered the topic knew this was a likely hidden truth.
You see, Gilani told us last Sunday, just days after news of the losses broke, that there was more to these trades than one hedge-gone-wrong.
"The idiots at the bank wanted to hedge against European credit exposure that they had," Gilani wrote last to his Wall Street Insights and Indictments readers. "They are idiots because the money that's shepherded by the Chief Investment Office (some $379 billion, yeah, that number is right) is money that the bank has and hasn't lent out, or technically is "available" to play with. And instead of parking it in U.S. government bonds (Citi has $293 billion of the same float and has 87% of it parked in "governments"), they parked a lot of it in Europe's crappy credit markets."
JPMorgan (NYSE: JPM) CEO Jamie Dimon Can Wallow in $23 Million
JPMorgan (NYSE: JPM) CEO Jamie Dimon continued his apology and damage control roadshow Tuesday when he addressed shareholders at the bank's annual meeting.
Even amidst regrets over the massive $2 billion trading loss, the merciful bunch of investors approved Dimon's $23 million pay package.
The repentant Dimon briefly addressed the group after the meeting began, requesting forgiveness.
"This should never have happened. I can't justify it. Unfortunately these mistakes were self-inflicted," Dimon admitted.
According to preliminary votes, an overwhelming 91.5% of shareholders approved Dimon's $23 million in salary and bonus for his 2011 performance, the same amount the 56-year-old CEO received in 2010.
Good news considering the Justice Department has started a probe into the $2 billion trading loss at JPMorgan, The Wall Street Journal reported. With few details about the investigation, The Journal noted that the inquiry has yet to zero in on what legal infractions may have been committed.
Nell Minow, co-owner and board member of research firm GMI Ratings, told Bloomberg News that the majority of votes regarding compensation and other topics were most likely cast before the loss was announced.
"I don't think that the vote will be indicative of shareholder concerns on this issue. It's unusual to have such shocking and bad news come in after most of the votes have been cast," Minow said.
Dimon, no doubt anxious to exit from the piercing eyes of concerned shareholders, moved the meeting along quickly, with the official assembly lasting just shy of an hour.
But Dimon left the pow-wow only to be greeted by a crowd of protesters, making its presence loud and clear with signs that criticized the $2 billion loss as well as the bank's actions in the housing market.
The Gloss is Coming Off the Eurozone
Europe, Europe, Europe…
I know, you're sick of hearing about problems in the Eurozone.
But the problem with Europe is that it won't go away. And if it does go away, we'll have even bigger problems. What a mess.
Of course, I'm talking about the Euro-currency zone and the European Union, not Europe itself.
I love Europe. I love every country in Europe. I love the different cultures. I love the different languages. I love the different societal models. I love the history of Europe.
And no doubt all the Europeans love all the same things about their Europe – except maybe some of their history.
But even more than loving Europe, Europeans love their own countries. Why? Because they have different cultures, languages, societal models, and differing views of their history. Vive la différence!
So, whose bright idea was it to gloss over (with shiny promises and, later, a shiny new currency) thousands of years of differences and shove all Europeans into a funnel in the hopes that they'd all come out the other end as one homogeneous mass of humanity?
Oh, that would be the bankers and financiers who wanted a United States of Europe so that the free flow of goods and services payable with a common currency would make everyone better off, and make themselves better, better off, by a lot of betters.
And now, what a surprise! There are differences all across Europe about, well, Europe and what it has become and where it has to go to get out of the mess it's created for itself.
How that's going to end is playing out right before our eyes.
Bank of America (NYSE: BAC) May Never Fully Recover
Bank of America (NYSE: BAC) has been working hard to regain its profitability and stature, but a better-than-expected earnings report isn't enough.
On Thursday the company reported earnings of 3 cents a share. Revenue came in light at $22.28 billion.
Although analysts were looking for 12 cents a share, several weighed in saying that a $4.8 billion charge known as debt valuation adjustment (DVA) complicated the earnings report. Some say BofA actually beat core earnings expectations.
Evercore analyst Andrew Marquardt wrote, "Our initial view of core is closer to 26 cents."
Return on average equity of 11.05% beat fourth-quarter results, but was less than the 15.41% return the bank posted for the first quarter a year ago. BAC succeeded in reducing its credit-loss provisions to $2.42 billion from $3.81 billion in the fourth quarter.
"You had very favorable tailwinds in the fixed-income markets and so trading revenues are very strong for this universe right now," Charles Peabody, an analyst at Portales Partners LLC in New York, said in a Bloomberg Radio interview. "There's no question the earnings that are being reported are very good — the question is the sustainability."
Despite beating estimates with its first-quarter earnings, BofA has struggled more than its counterparts in the wake of the financial crisis. The damage may be too much to allow the bank to grow to as big as it once was.
Is JPMorgan (NYSE: JPM) Setting Delta Airlines (NYSE: DAL) Up For a Crash?
The devil is in the details.
According to various reports, Delta is in talks to purchase the idled "Trainer" refinery facility in Philadelphia with assistance from JPMorgan Chase as its financier.
On the surface, the deal seems to make perfect sense. Jet fuel is very expensive.
Delivering jet fuel to New York Harbor would have cost you $1.94 a gallon five years ago. Today it's $3.12, or 60.82% higher according to Bloomberg.
Owning a refinery would be a good way to lock up supplies and keep fuel costs down in today's world.
It's so smart I'd watch for United, British Airlines and Lufthansa to do the same in short order. Perhaps even the regional carriers will get in on the action at some point, too.
All are "route heavy" on the Eastern U.S. seaboard where many refineries have to pay for more expensive imported Brent crude because they can't access less expensive West Texas blends or alternatives coming from North Dakota shale fields.
But what the frack?
Ordinarily, airlines would simply hedge price increases like this in the futures markets.
So there must be something else at work that would make Delta and presumably other carriers so desperate they're willing to enter the refinery business. After all, it's a tough business — even for oil companies.
Two thoughts come to mind specifically about Delta: a) its geographic concentration, and b) its credit rating, which stinks, may be so bad the airline can't cost effectively hedge in the open markets.
Few people realize this but several major oil companies, including Sunoco, Hess Corp, Valero and ConocoPhillips — just to name a few — are planning to close, idle or otherwise shut down refineries on the east coast.
That would remove 51% of U.S. East Coast refinery capacity from the equation by some accounts.
This means that delivering fuel into the northeast corridor's airports is going to become especially problematic and more expensive.
In that sense, one could argue that Delta is taking prudent steps to secure its own supplies while building in defenses against higher prices ahead.
I can't find fault with that given that every penny increase per gallon costs Delta $40 million more on an annualized basis, according to Bloomberg. I would be thinking along the same lines.
But I don't "buy" it even though the airline spent $11.8 billion on fuel last year and understandably wants to save money.
Here's where it gets interesting (and I get suspicious).
Investing in Financial Stocks: Is Now the Time to Bank on C, COF, BAC or JPM?
Based on recent performance from the sector's biggest names, it's easy to argue that financial stocks are making a comeback.
Indeed, a survey of 184 analysts conducted by Bloomberg News in January expected bank profits to rise 57% in 2012.
"The banks could get some positive operating leverage in 2012 from trading normalizing and expenses normalizing," Chris Kotowski, an Oppenheimer & Co. (NYSE: OPY) analyst, told Bloomberg.
Kotowski expects an 18% earnings-per-share increase for each of the six major investment banks.
But guess what? A year ago that same survey of analysts predicted profits would climb 32% in 2011.
Instead, financial stocks were the worst performers among 10 industries tracked within the Standard & Poor's 500 Index.
So far in 2012, however, financial stocks are the second leading sector in the S&P 500 with an 18% gain. That compares to an 11% gain by the broader market.
In short, whether you are looking at Goldman Sachs Group Inc. (NYSE: GS) or the entire financial sector, last year's losers have suddenly become this year's winners.
So is it time to take some chips off the table, or is now the time to double down for the long term?
2012 Financial Crisis: Wall Street's Latest Scheme Uses Your Bank Account to Create the Next Crash
In 2008, reckless credit default swaps nearly obliterated the global economy. Now comes the next crisis – rehypothecated assets.
It's a complicated, fancy term in the global banking complex. Yet it's one you need to know.
And if you understand it, you will get the scope of the risks we currently face – and it's way bigger than just Greece.
So follow with me on this one. I guarantee that you'll be outraged and amazed – and better educated. You'll also be in a better position to protect your assets at the end of this article, where I'll give you three important action steps to take. So follow along…
Higher Bank Dividends Would Relieve Shareholder Stress
The real winner in last week's bank stress tests should have been the shareholders.
But after the stress test results on 19 top financial institutions were announced last week and all but four of them passed, shareholders with bank dividends were left wanting more.
Of course, the more successful banks – like JPMorgan Chase & Co. (NYSE: JPM) – did announce modest dividend increases, and large share repurchases immediately afterwards.
The problem is they didn't go far enough.
Even now, after these increases, bank dividends still remain far below the level of 2007 in many cases, and represent only around a quarter of net income.
For bank shareholders, that makes no sense.
I'll tell you why.
The Case for Higher Bank Dividends
The great majority of bank shares in the United States are commercial banks, which take deposits from customers and lend money to businesses.
That is an intrinsically low-risk business, unless the bank is lending recklessly.
In addition banks provide credit card and other services to consumers and businesses, all of which are relatively low in risk.
They are also slow-growth, since the U.S. economy grows only 2-3% per annum on average. Being slow-growth, low-risk businesses, banks do not need to grow their capital rapidly.
Of course, bank services did grow faster than the economy from 1980-2007, but that is every reason to think that was something of bubble, and that much of the excess returns available to banks in those years is now gradually washing out of the system.
As a result, banks can afford to pay a high percentage of their earnings in dividends – perhaps as high as 70-80%.
Here is What's Wrong With Bank of America (NYSE: BAC)
If you have a mortgage with Bank of America (NYSE: BAC) and want to refinance, don't bother.
You are not worth the bank's time. Or at least I wasn't.
That's what I learned first-hand last week when I called Bank of America to refinance a home mortgage I've had with them for years.
My jaw practically hit the floor when Alejandro from BofA's mortgage department told me this over the phone.
"Because of excessively high demand," Alejandro said, "we can't accept your refinancing application. But we can take a reservation and have an agent call you in 90 to 120 days."
Huh?…You can't be serious.
I really have to wait three or four months to even apply for a lower interest rate when I've been an existing customer for years?
Yeah, I bet, I thought to myself…
They'll call me when interest rates are much higher or when BofA works its way through its part of the $25 billion robo-signing settlement reached over its abuses in the foreclosure process.
Of course, all of this is after BofA received $45 billion in taxpayer bailout funding.
And after they reportedly shifted the risks associated with $75 trillion in derivatives from its investment banking and trading units to BofA's depository arm, a unit flush with FDIC-insured deposits.
But that is another story for another day.
How Bank of America Treats its Customers
Suspecting something wasn't quite right, I made a second call to BofA to inquire about a new loan.
Not ten minutes later I was put through immediately to an underwriter who was all too happy to help a new, unknown prospect – a.k.a. me – take on more debt. Imagine that.