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Should JPMorgan Chase get a second chance?



By Pam Martens and Russ Martens: June 28, 2019 ~

  Jamie Dimon, Chairman and CEO, JPMorgan Chase

Jamie Dimon, Chairman and CEO, JPMorgan Chase

How many second chances should a criminal repeat offender have received? JPMorgan Chase has committed three crimes in the past five years. There is a prudently traded precious metals trader who sings the Feds, as JPMorgan admits in regulatory documents, that a new criminal investigation has been initiated into this matter. The bank has paid fines of $ 36 billion since the financial crash, including $ 1

billion for exotic derivatives trading in London with bank deposits and at least $ 6.2 billion in losses this deposit money (the London whale scandal). And just last year, it proved that it's about more fines and illegal profits. (Could JPMorgan Chase be hit by a fourth set of offenses in the manipulation of precious metals markets?)

Despite all this, the Federal Reserve yesterday announced that it has given JPMorgan Chase a second chance to pass the regulator's stress test.

] According to the Fed's announcement, all of the 18 mega-banks it has subjected to a stress test passed the second phase of its stress test, known as the Comprehensive Capital Analysis and Review (CCAR). One bank, Credit Suisse, had to "address certain limited vulnerabilities in its capital planning processes".

But JPMorgan Chase and the much smaller Capital One, which contains no offenses, could only cope with the stress test because the Fed allowed them to submit their plan a second time. (It's as if you did not pass your Wall Street licensing exam, which you have to prepare for months, and then you can take an open text test.) The Fed said:

"In the highly unfavorable regulatory scenario Capital One Financial Corporation (Capital One) and JPMorgan Chase & Co. (JPMorgan) should have at least a post-stress minimum capital ratio below the prescribed minimum capital ratios based on their originally planned capital measures. Capital One fell below the minimum requirements for the Common Equity Tier 1 capital ratio, the Common Equity Tier 1 capital ratio and the total capital ratio after the stress. JPMorgan has undercut the minimum requirements for Tier 1 ratio, Tier 1 leverage and the additional post-stress leverage ratio. However, both Capital One and JPMorgan managed to keep their regulatory capital ratios above the minimum requirements after the stress in the extremely unfavorable scenario after submission of adjusted capital measures.

The word "lever" is used twice in this paragraph and refers in both cases to JPMorgan Chase. What could the Fed refer to? As of March 31, 2019, JPMorgan Chase had a face value (principal amount) of $ 59,945,545 million on its derivatives, which amounted to $ 348 billion, according to the most recent report by the Office of Auditors (OCC). Credit exposure from derivatives versus 201.5 billion billion risk-based capital, which corresponds to a total credit exposure of 173 percent. (See Table 4 attached to the OCC report here.)

However, this is only the capital risk that the public and regulators are aware of. Emily Flitter reported in The New York Times last July: "A decade after a financial crisis, fueled in part by a network of derivatives, regulators still have an incomplete picture of who owns what." , This is because the mega-banks "do not need to inform US regulators about their holdings of derivatives in certain offshore companies."

A JPMorgan Chase spokesman told Mr. Flitter that "the number of derivative transactions not reported to the US regulator is not known to account for less than 10 percent of all bank derivatives." Ten percent of $ 59 trillion $ 5.9 trillion, which is not exactly a stupid change, and if these are the risky credit derivatives that blew most of Wall Street in 2008, that's no small matter.

Hiding problematic things is not far-fetched at JPMorgan Chase When the Senate's Standing Subcommittee on Investigation released its 300-page report on the bank's London Whale losses, it revealed the following: As of January 16, 2012, JPMorgan's Chief Investment Office held Chase, which is in the federally insured commercial bank, has $ 458 billion (fictitious) in domestic and foreign credit default swap indices. Of this, $ 115 billion was attributable to an index made up of companies with junk bond credit ratings that the insured bank was not allowed to own for security and solidity reasons.

JPMorgan "has transferred the market risk of these positions to a subsidiary of an Edge Act company, which suffered the most losses. "An Edge Act Company refers to a bank's ability to obtain a special certificate from the Federal Reserve. By establishing an Edge Act company, US banks can make investments that are not available under the usual banking laws.

Pay close attention to which federal regulator JPMorgan Chase has closed this gap. It was the Federal Reserve, the same agency that has just given the bank a second test run to pass its stress test.

We knew that this year's Federal Reserve stress test results would initially be a big illusion involved in a costly PR campaign in March, when the Fed underwent a rule change without the usual 30-day delay. The rule change removed the so-called "qualitative" measure as a bank failure tool in its stress test. The message sent by the Fed to banks like JPMorgan Chase is that you do not have to worry about a brave bank accountant causing you to over-ride your stress test because you have not reported and / or controlled money laundering, for example. Insider trading, bribery or market manipulation because we simply spend the qualitative measure of managing your bank.

Dennis Kelleher, president and CEO of non-profit monitoring commissioner Better Markets, issued this statement following the news of the change in the rules:

"The Fed appears to be setting a double standard for transparency, which the largest banks face the public and the market discipline preferred. On the one hand, the Fed will provide these banks with much more information about the stress tests. On the other hand, the Fed will no longer disclose its qualitative assessment of these banks to the public.

"Both changes are unwise and undermine the ability of the public and the markets to fully and fairly evaluate the state of the banks The largest banks in the country or the quality and robustness of the Fed tests.

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