Morgan Stanley Answers The 11 Biggest Questions About The JPMorgan's Huge Trading Loss

JP Morgan Jamie DimonJames Dimon talks to reporters after participating in a Financial Crisis Inquiry Commission hearing on Capitol Hill.

Photo: Mark Wilson/Getty Images

Morgan Stanley’s top banking analyst Betsy Graseck just released an excellent report titled The $X Billion Question, which evaluates JPMorgan and the CIO unit that has reportedly lost over $2 billion on some bad trades.Morgan goes through to look in depth at what the group was trading, what the performance of the unit should look like going forward, and how big of an affect the ongoing loss will have on both the bank and the rest of the industry.

Her report included an FAQ which we highlight here.

What's our credit hedge loss estimate?

All in, Graseck estimates a $5.2b of pre-tax hedge losses, of which $3.25b is recognised in Q2.

Source: Morgan Stanley

What's the synthetic credit trade that JPM has?

Graseck bases this from reports from WSJ, NYTimes, Bloomberg

1) Bought protection on the 2012 IG9

2) Sold protection on 2017 IG9

3) Bought protection on High Yield Index

Source: Morgan Stanley

What's the price action been on those legs?

Spreads on IG9 2012s are up 20% QTD. Spreads on IG9 2017s have widened 36% QTD.

Source: Morgan Stanley

What earning has the Chief Investment Office (CIO) generated (from 2005-present)?

Graseck estimates that it generated $6.2b in earnings in the past 2 years, while generated losses from 2005 to 2008.

Source: Morgan Stanley

Can we track which way the trade is moving?


Source: Morgan Stanley

So what's next?

CEO Jamie Dimon is expected to speak at an industry conference at 9:30am, Monday, May 21.

Source: Morgan Stanley

What is our current estimate for CIO (2012-2015)

Graseck expects to the CIO portfolio to trade more plain vanilla securities. Earnings are expected to decline to about 2% of JPM earnings.

Source: Morgan Stanley

What is the role of the CIO office vs. Treasury?

'The CIO office invests JPM's excess deposits...Corporate Treasury manages liquidity for the firm'

Source: Morgan Stanley

What type of investments does CIO office make?

The CIO invests mostly in mortgage-backed securities.

Source: Morgan Stanley

How is CIO VaR Trending?

Average Value-at-Risk rose to $129m in Q1. VaR averaged $59m from 1Q10 to 4Q11.

Source: Morgan Stanley

Finally, what is the impact on the industry?

'We expect greater regulatory scrutiny and likely more plain vanilla CIO investment.'

Source: Morgan Stanley

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