Using Veritas to Construct the "Per…

29-04-2017 Hits:94542 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

Read more

The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:85473 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

Read more

What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:85841 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

Read more

Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:89943 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

Read more

This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:88378 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

Read more

What is the Value Proposition For Verita…

01-04-2017 Hits:88122 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

Read more

This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:59263 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

Read more

Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:87712 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

Read more

Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:87269 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

Read more

The Country's First Newly Elected Lame D…

27-03-2017 Hits:87609 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

Read more

Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:94010 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

Read more

The Transformation of Television in Amer…

21-03-2017 Hits:91301 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

Read more

JPM derivative and off balance sheet lending commitments and guarantees exposure

Warning!!! This is the type of investigative, unbiased and independent analysis that you will never find in the mainstream media. Long live the Blogoshpere!!!

As we step through the various exposures that this most esteemed bank has, keep in mind that as of June 30, 2009 JPM's common shareholder's equity and tangible common equity stood at $147 bn and $79 bn, respectively. You tell me if the risk inherent in our banking system has been mitigated, please!

Off balance sheet lending commitments and guarantees

As of June 30, 2009, JPM had exposure of $85 billion (or 108% of its tangible equity) towards off balance sheet lending commitments and guarantees. The contractual amount of the off balance sheet lending commitments and guarantees represents the maximum possible credit risk should the counterparty draw upon the commitment or JPM be required to fulfill its obligation under the guarantee, and the counterparty subsequently fail to perform according to the terms of the contract.

 Click any and all graphics to enlarge to printer quality.



Derivative exposure

As of June 30, 2009, the total notional amount of derivative contracts outstanding as of June 30, 2009 was about $80 trillion (or 101,846% of its tangible equity). I hear a lot of you smart guys and gals out their saying, "But hold on a minute there, big fella! Notional amount quotes are misleading. It is the net exposure that truly determines economic risk." Okay, smart guys and gals. I guess I can buy that, at least in part. The only issue is that there is no free lunch. Let's move on to see how this can play out. Let's ascertain the fair market value of JPM's derivative exposure.


Gross fair value (before FIN 39) of the derivative receivables and derivative payables was $1,798 billion (or 2,276% of its tangible equity) and $1,749 billion (or 2,214% of its tangible equity), respectively. The, fair value of JPM's derivative receivables (after FIN 39) was $84 billion (or 106% of its tangible equity) while the fair value of JPM's derivative payables (after FIN 39) was $58 billion (or 73% of its tangible equity). FIN 39 allows netting of derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists between JPM and a derivative counterparty. 

How does JPM swap out $1.8 trillion dollars of fair value market exposure to the much smaller $84 billion (which is still more than 100% leveraged at 106% of its tangible equity) net amount? What magic has the financial engineering wizards that have created the original FrankenFinance monsters (see Welcome to the World of Dr. FrankenFinance!  for more on this scary alchemical mischief) used to accomplish such a feat? By netting the risk out, of course! Hey!!! Doesn't that mean that JPM has swapped one form of risk for another? If one were to consider the $1.8 trillion amount to be invalid due to the claim that JPM has offsetting agreements with other entities, then JPM is reliant on the solvency, liquidity, and management of said "other entities". Thus, JPM has swapped a more than $1.7 trillion of market risk for roughly more than $1.7 trillion of counterparty risk. I think it is quite misleading to simply pretend the credit and/or market risk just,,,, well,,,,, disappears. Ask Lehman Brothers', AIG's or Bear Stearns' counterparties if that market risk (which was allegedly netted out) simply disappeared - or was it just transformed into another form of risk? I think Goldman Sachs knows above all, if it wasn't for strong government connections, about $13 billion of "netted" market risk would have shown up on the books as a loss due to counterparty failure. Luckily, they manage their "political risk" quite well through the strategic purchase of key government (ahem) opinions, at least thus far...

So, if JPM has more than $1.7 trillion of counterparty risk (or 2,152% of its tangible equity) that is NEVER mentioned in the mainststrem or popular financial media, exactly what are the chances of that counterparty risk being tested? Let's stroll through the credit quality of their derivatives and offbalance sheet portfolio from a bird's eye view.


About 23% of the derivative receivables (in terms of fair value after FIN 39) were below investment grade (less than BBB or equivalent) while 12% were rated BBB or equivalent.


Credit derivative positions

JPM's credit derivative positions include positions in the dealer client business as well as positions entered for credit portfolio management. The total notional amount of the credit derivative positions as of June 30, 2009 was $6.8 trillion


Within the dealer/client business, JPM utilizes credit derivatives by buying and selling credit protection, predominantly on corporate debt obligations, in response to client demand for credit risk protection on the underlying reference instruments. Protection may be bought or sold by the Firm on single reference debt instruments ("single-name" credit derivatives), portfolios of referenced instruments ("portfolio" credit derivatives) or quoted indices ("indexed" credit derivatives). The risk positions are largely matched as the Firm's exposure to a given reference entity under a contract to sell protection to a counterparty may be offset partially, or entirely, with a contract to purchase protection from another counterparty on the same underlying instrument. Any residual default exposure and spread risk is actively managed by the Firm's various trading desks. After netting the notional amount of purchased credit derivatives where the underlying reference instrument is identical to the reference instrument on which the Firm has sold credit protection, JPM has net protection purchased of $82 billion along with other protection purchased of $77 billion.

So that's it. They are square, then. Of course unless the sellers of their protection default. If they do, then it may very well cause a daisy chain reaction that could get very ugly (see Counterparty risk analyses - counter-party failure will open up another Pandora's box). If you thought Lehman caused problems, compare Lehman's counterparty exposure to JPM's. Of course, JPM is one of the government's favored sons, clearly articulated as being "too big to fail". I posit this though - imagine Tim Geithner going back to congress saying, "I know my predecessor extorted $780 billion out of you by threatening the collapse of the entire financial system, and I know Bernanke has been handing out barely collateralized loans by the hundreds of billions like a pervert in a porn shop without security, but JPM is just too big to fail and they have $1.7 trillion plus of exposure that looks to be about blown up - chain reaction style - and they only have $79 billion of tangible capital to make good on it. How much TARP did you say was left again???"


Looking at the credit quality of the reference entity under the protection sold by JPM, about 34% of the credit sold (before the benefit of legally enforceable master netting agreements and cash collateral) was below investment grade as of June, 2009.


Gains and losses on derivative exposure

In 2Q09, JPM recorded net gains on derivatives of $16 million in earnings after recording $6 billion of gains from trading activities offset by losses of $4.6 billion on risk management activities and by losses of $1.4 billion on fair value hedges. Risk management activities include fair valuation of the derivatives used to mitigate or transform the risk of market exposures arising from banking activities other than trading activities. Now, you tell me... With the advent of FASB caving in to politicians and Wall Street special interests and allowing financial entities to basically rewrite the profit and loss statements of non-marketable (actually there is no such thing, let's call it "assets whose market price management does not like the sound of") assets, what are the chances that JP Morgan fudged the results just a little bit, in order to eke out that $16 million gain, which is actually about a 0.267% profit margin!

Exposure to unconsolidated VIE

As of June 30, 2009, maximum exposure to loss from unconsolidated VIE included $32.3 billion under arrangements with multi seller conduits, $7.9 billion from nonconsolidated municipal bond vehicles, $27.2 and $6.0 billion through derivatives (the exposure varies over time with changes in the fair value of the derivatives) executed with the VIEs. This exposure to off balance sheet loss is basically all of JPM's tangible equity - nearly all of it, and this is just the off balance sheet VIE stuff!


I will be offering a full blown forensic analysis and valuation to subscribers (click here to subscribe) since I have always believed JPM to be insolvent (if one were to mark all assets to market and take the appropriate capital charges for the risk that it has undertaken) but never really took the time to find out if my hunch was correct. I will try to get it out in the next week, and we shall see if my hunch concerning this bank was on point or not.