Wednesday, 21 January 2009 23:00

Re: JP Morgan, when I say insolvent, I really mean insolvent

Do you remember what I said on January 6 (Amid the rally, I look at the Doo Doo 32 and their receipt of the TARP)? Well, believe it or not, Mr. Market along with members of the Bush Administration and certain CEOs are allowing members of BoomBustBlog to actually get paid from the same set of research for a 5th time in less than a year. This has got to be a record! I am of the mindset that this type of behavior will not continue for much longer, for I get the feeling that Barack and crew are a bit more serious about putting the bank issues to bed than the previous administration. Be that as it may, until they get their machinations firmly entrenched, and as long as banks are shuffling taxpayer money out the door in the form of dividends ala ponzi scheme et Madoff, my subscribers have the opportunity to profit immensely.

I have said it before, and I'll say it again - JP Morgan is insolvent! Anybody from JPM who wants to correct can simply email me via the contact form at the top of my site to show me where I'm wrong. I am always willing to admit that I am wrong when I actually am. I don't think this is one of those times. Keep in mind that throughout this entire credit debacle, I haven't been wrong about a bank or insurer yet. I have called all 32 of the Doo Doo 32, Bear Stearns, Lehman, GGP, MBIA, Ambac. Simply search my blog for the articles, for most of these companies have fallen in share price more than 98% (with the Doo Doo 32 being an exception since that was more of a macro call).

Despite heavy government subsidies (in my opinion, JPM is the beneficial recipient of over $100 billion of government aid and other capital, between the Bear Stearns subsides, backstops and guarantees, WaMu seller's concessions and TARP) I am still confident in declaring JPM insolvent. They have pre-announced earnings to coincide with the feel good aura of the Obama inauguration - good move, but it didn't work. I can still count even if I do feel good. JPM incurred an operating loss, masked by accounting shenanigans (these things don't fool me, I can count) and one time asset sales. Basically, the JPM dividend is being funded by tax payer monies (TARP) and asset sales, hidden by accountants who may been smoking some of those creativity tea leaves I hear they sell in Jamaica, you know that dark green Sensimilia! I've decided to divulge a bit of the top secret subscriber research to the public through an open post available to all. I've done this as to illustrate to those who are not part of our closed community the travesty and trouble that is what appears to be the MSMs (mainstream media) most respected and well run bank. The real juicy stuff (valuations and a sample trade optimized for risk/reward) will be available for download to retail and pro subscribers, accordingly.

Here is some JPM accountant's Sensimilia inspired food for thought:

  • While the banking world is bustin' their ass to delever, JPM is currently sporting a ~30x leverage ratio.
  • In
    4Q2008 derivatives increased substantially to $163 bn from $118 bn in
    3Q2008 and $77 bn in 4Q2007. Much of the increase in 3Q2008 was due to
    acquisition of Bear Sterns. As of September 2008 JPM has a $118 bn worth
    of derivatives on its balance sheet while the notional value of these
    derivatives is $84.3 bn.
  • As a reminder, JPM is the WORLD's largest credit derivative counterparty. With that note in mind, realize that JPM's trading VaR is up 50% while its increase in derivatives receivables are up nearly 40%. This all occuring as JPM is trying to delever by shedding assets,
  • According to September 2008 filings although bank had sold credit
    derivatives of $4.5 bn and purchased credit derivatives of $4.6 bn (net is
    nearly 0) the bank has recorded a fair value of $28.5 bn (as of Sep' 08)
    against notional amount of $9.2 bn.
  • JPM’s level 3 assets
    have increased significantly due to purchase of Bear Sterns, reaching 17.5% of
    total assets at fair value from 11.2% as of December 2007.
  • As of Q3 08, JPM sported an adjusted leverage of 32x! That is just what we could find on balance sheet. You know there has to me some stuff off balance sheet somewhere that is hidden from me. And to think, some people thought Bear Stearns and Lehman were highly leveraged... Oh yeah, that's right! JPM bought Bear Stearns and Lehman went bankrupt. Hmmmm!

Despite all of this, JPM actually rallied 40% up after the bank rout the other day and continued to drift up after hours. Cool, the kids gotta eat! You see, the counter-argument to the JPM short is that it the government has set up juicy wide spreads in certain trades that will allow banks such as JPM to earn their way out of insolvency. Well, this will work for solvent banks, but the very insolvent one's are just about out of time. The trades entail borrowing low and lending high, but who will you lend to? Think about it. If you are a very strong credit risk right now, you are probably not in the market to borrow money unless you have a relatively risky deal you are trying to finance. Of course, there are a lot of other entities and persons who are in the market for loans right now, but those are the one's that should have never been lent to in the first place and are definitely not the ones you want to lend to now. Adverse selection via Taxpayer subsidy! That's what I call it. The insolvent banks are between a rock and a hard place.

In addition, and as the article below illustrates, banks are using TARP to do the same thing that Madoff allegedly did. They are placating investors in an unprofitable business (remember JPM had an operating loss this quarter) by taking the capital received from new investors (the US tax payer) and paying off older investors (shareholders through dividends and bond holders through interest). The technical finance term for this is called, PONZI scheme. To see the Ponzi scheme in detail, as well as valuations, download the subscription material. For the first time, I will also include sample trades with an optimized risk/return profile based upon the findings of the report for professional level subscribers and above. The samples include a vertical ratio spread vs straight shorting of stock vs long only put purchases. Keep in mind that there is no need to get fancy with solid research. As both my long time subscribers and the 2008 Blog Research Performance attest, all you really have to do is buy a simple position and hold in the case of a company that is bankruptcy (or receivership) bound. Alas, since subscribers have been clamoring for trade info, I will occasionally remit such. I want to make it clear that these sample trades do not necessarily reflect what I do in my own proprietary account (which is I call it "proprietary") but are feasible assuming a relatively strong background in options and stock trading.

pdf JP Morgan Q408 quarterly valuation opinion - Retail 2009-01-22 08:49:26 79.24 Kb

pdf JP Morgan Q408 Quarterly opinion with sample trades - Professional & Institutional 2009-01-22 08:48:02 211.69 Kb

Subscription plans and pricing

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Even on an unadjusted, accountant polluted basis, the economic value of non-performing assets just about wipes out shareholder's equity.


When adjusting for intangibles, JPM's equity holders are underwater 1.4x over!


The Eyles test shows JPM's current reserve for loan losses shortfall as % of tangible shareholders' equity (non-accrual loans on an economic basis). No matter which way you look at it (as long as you REALLY look at it) the common shareholder's of JPM are done for. Maybe this is why they are still paying a dividend. "Get as much (taxpayer) money out of the door as possible before the one of those damn bloggers start spewing the truth and the feces hits the fan blades"!


Yeah, you think the subprime category is eating heavily into equity, wait until the Option ARMs start to recast AND guys like me make it known the accounting BS that JPM is trying to pull in order to hide the fact that WaMu's purchase is killing it!

Bloomberg: Kill JPMorgan’s Dividend, Save America’s Banks: Jonathan Weil

Memo to JPMorgan Chase & Co.: Your
dividend needs to go.

For all the complaints that U.S. banks aren’t lending enough
money, the bigger problem may be they’re giving too much away.
Here we are amid the greatest banking crisis in 80 years, and
some of the biggest, purportedly shrewdest banks keep acting as
though they can spend their way into solvency by plying
shareholders with outsized quarterly checks.

The latest numbers from JPMorgan say it all. Last week, the
nation’s largest bank by market value reported $702 million of
net income for the fourth quarter. That was about half as much as
the $1.4 billion it paid in dividends to common shareholders. The
company barely earned its dividend for the year, too, when net
income and common dividends each were about $5.6 billion.

JPMorgan’s chief executive officer, Jamie Dimon, says the
dividend is sustainable. “This company has enormous earnings
power,” he said on the company’s Jan. 15 earnings conference
call. “We feel an obligation to pay the dividend. So we feel
pretty good about it, and so we’re not that concerned about it.”

That’s hardly convincing. JPMorgan would have reported net
losses the last two quarters were it not for $1.9 billion of
nonrecurring gains from accounting adjustments, related to the
company’s purchase last September of the banking units of the
failed thrift Washington Mutual Inc.


JPMorgan already has received $25 billion of government
bailout cash. It would pay almost a fourth that much in common
dividends this year. That doesn’t include the interest the bank
separately must pay to the U.S. Treasury on its preferred stock.

After Bernard Madoff’s Ponzi scheme, it should be out of
fashion for financial companies to pay returns to old investors
with money raised from new investors. Put aside the unseemliness
of paying dividends with taxpayer bailout cash, though. The best
reason for JPMorgan to slash its dividend is self-preservation.

...Dimon, who also is JPMorgan’s chairman, already may have
waited too long to hack the bank’s dividend. That’s no excuse for
further delay. JPMorgan’s bosses should start showing they’re
prepared for the worst. The longer they dither, the greater the
risk for us all.

Last modified on Wednesday, 21 January 2009 23:00


  • Comment Link Reggie Middleton Friday, 23 January 2009 13:44 posted by Reggie Middleton

    Many companies are guilty of shenanigans, that does not mean lying. If I say my assets are worth $100 billion according to GAAP (knowing economically I only have $50 billion in assets), but GAAP allows me to count by 2's, am I lying? No. Am I guilty of financial shenanigans? Yes. This is what separates the smart money from the other money.

    I consider it BS, if you don't that's perfectly understandable. JPM is moving up a few dollars today, feel free to buy some shares. Hey, I'll even short sell you some.;D

  • Comment Link asdsa Friday, 23 January 2009 13:29 posted by asdsa

    you say JPM does shenanigans('something that is deceitful'),'associated BS' and you claim you are not accusing them of lying to shareholders?
    lol, thats all I got to say

  • Comment Link rahul Friday, 23 January 2009 13:18 posted by rahul

    It seems u gt it wrong..seems u were in bit of a hurry

    Tier one capital mentioned in the report (page 4) is indeed 10.8% and not 6. (where is the mention of 30??)
    Refer to

    Also which 10K are u referring to ? The last 10K was filed on Feb 2008. Lot of things have changed since then !!!! That 10-k (an year old) says JPM has Tier 1 leverage ratio of 6% and Tier 1 capital ratio of 8.4%. [b]FYI: Tier 1 leverage ratio and Tier 1 Capital ratio are 2 different concept altogether. [/b]

    Also the report says level 3 assets as % of total financial assets at fair value and not total assets...

    : -)

  • Comment Link Reggie Middleton Friday, 23 January 2009 11:49 posted by Reggie Middleton

    The latest 8k came out today, the article was written 2 days ago, hence used represenations culled from the companies press releases. More importantly, we adjust the accounting values to what we consider reality. See the linked professional pdf's for details on what was done and why. These are downloads are for paid subscibers, though.

    JPM was, in our opinion, very aggressive and unrealistic in their accounting treatment of certain assets.

  • Comment Link Reggie Middleton Friday, 23 January 2009 11:42 posted by Reggie Middleton

    @ asdsa
    I don't recall accusing JPM of lying to shareholders. I may have implied that some shareholders may not be able to discern the difference between accounting numbers and economic numbers, but that would not entail JPM's specifically lying, would it?

    The charts came directly from the balance sheet and the reporting docs. I'd like to pose a question to you. Why haven't you given me anything for free? Seriously, I didn't receive anything of value from you without paying for it. Sounds like a silly question? Well, it is no more silly than your implying that I (an accomplished investor), and two whole teams of well paid forensic accountants and CFA's will spend 80 hours pouring over documents and filings, creating extensive models and making phone calls and emails - all just to give you information that you cannot (or do not, I don't want to assume) develop on your own - for free. I mean why should these CFAs, CPAs, global macro investors - these "people" work for a living when they can just work to give you free info or knowledge without compensation?

    It is the inability of the Mainstream Media to handle attitudes and expectations such as yours that has driven them to the verge of insolvency - and beyond! You probably don't work for free, but you expect others to do so.

    I gave you plenty of reason to suspect that JPM may be insolvent in the article. If you want the nitty gritty details, pay for it. If you feel the info is not worth paying for, that is perfectly understandable. There are a plethora of totally free boards (as opposed to partially free boards), such as Yahoo Finance discussion groups, that were explictly designed to sate the appetite of those who believe that knowledge of significant value shuld be givent away for free. I, personally, believe that there is a difference in quality in the information of the two media sources, but that is because there is a difference in the resources that go into developing the proprietary content - get it?

  • Comment Link inwestor Friday, 23 January 2009 10:59 posted by inwestor

    Latest 10-k says:
    1) Tier 1 capital ratio of 6. You say 30.
    2) Level 3 assets as a percentage of total Firm assets is 5%. You say 17%.
    Please clarify.

  • Comment Link Phil V Friday, 23 January 2009 08:24 posted by Phil V

    Good article on this:

  • Comment Link asdsa Friday, 23 January 2009 08:13 posted by asdsa

    Just where did you got those charts?What is all the BS accounting that you did not explain?You accuse a bank of being insolvent and lying to shareholders then say 'pay me and I will prove it', you do the same shenanigans

  • Comment Link NDbadger Thursday, 22 January 2009 18:10 posted by NDbadger

    Sun Trust's numbers looked awful. For starters, the texas ratio now approaches 50%, as does the NPA/TCE. All credit metrics continue to deteriorate at a rapid pace. Losing money yet continuing to pay a dividend further eating into shareholder equity. At what point do they put this thing in receivership?

  • Comment Link Reggie Middleton Thursday, 22 January 2009 14:32 posted by Reggie Middleton

    [url=]The Economist on the Future of Finance[/url]

    [quote]Finance is increasingly fragile. Barry Eichengreen of the University of California at Berkeley and Michael Bordo of Rutgers University identify 139 financial crises between 1973 and 1997 (of which 44 took place in high-income countries), compared with a total of only 38 between 1945 and 1971. Crises are twice as common as they were before 1914, the authors conclude.

    The paradox is that financial markets can function again only if this lesson is partly forgotten. Financial transactions are a series of promises. You hand your money to a bank, which promises to pay it back when you ask; you invest in a company, which promises you a share of its future profits. Money itself is just a collective agreement that a piece of paper can always be exchanged for goods or services.

    Imagine, for a second, how finance began, with small loans within families and between trusted friends. As the circle of lenders and borrowers grew, financial transactions were able to muster larger sums and to spread risk, even as promises became harder to enforce. Paul Seabright, an economist at the University of Toulouse in France, observes that trust in a modern economy has evolved to the miraculous point where people give complete strangers sums of money they would not dream of entrusting to their next-door neighbours. From that a further miracle follows, for trust is what raises the billions of dollars that fund modern industry.

    Trust’s slow accumulation pushes financial markets forward; its shattering betrayal batters them back. Sometimes this is through bad faith, as when Bernie Madoff, a grand fund manager, allegedly made his investors $50 billion poorer, or mortgage-sellers tempted naive borrowers. But promises made in good faith can be broken too. Indeed, honest failure is even more corrosive of trust than outright criminality. Everyone understands that now.[/quote]

  • Comment Link Reggie Middleton Thursday, 22 January 2009 11:11 posted by Reggie Middleton

    A hundred and forty billion here, a hundred and eighty billion there, what difference does a few trillion pennies make in the scheme of things.:'(;D

  • Comment Link Shawn Hughes Thursday, 22 January 2009 10:59 posted by Shawn Hughes

    Here's the link:

  • Comment Link Shawn Hughes Thursday, 22 January 2009 10:57 posted by Shawn Hughes

    Just before LEH went bankrupt, the Fed gifted JPM about $130B to cover any losses they might suffer due to the bankruptcy.

  • Comment Link Reggie Middleton Thursday, 22 January 2009 10:32 posted by Reggie Middleton

    I heard quotes regarding the Tier 1 capital of State Street, JPM, etc. being more than adequate. I say look past that into the ratios of trash to tangible capital, and therein lies the reason why the smart money (those that follow BoomBustBlog) have been able to profit when everybody else is taking a bath.

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