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JP Morgan Cold Feet Over Risk

2012 September 1
tags: , , ,
by sv
jp-morgan

Things keep going wrong with JP Morgan.  According to Wall Street Journal, JP Morgan Chase is looking to reduce risks associated in a business that is crucial for Wall Street’s money velocity,and also one of the bank’s most lucrative. What exactly would make the bank begin to get out of this service is not exactly made clear by the article, but it appears as though something big could have gone wrong.  The bank, the nation’s largest, is going over its transactions with dozens of brokerages that use the bank to settle trades, according to people close to the bank.

The business in question, clearing and settlement, calls upon JP Morgan to stand between buyers and sellers of securities to help oversee financial commitments backing hundreds of billions of dollars in transactions daily. JP Morgan’s review began more than six months ago of this part of their overall operations, and will result in them reducing the amount of business they do with certain clients while cutting off others completely.

Clearly, caution is increasing at JP Morgan, as the financial industry and the bank itself deals with a barrage of high-profile scandals, such as Libor. JP Morgan has been at the heart of numerous scandals, the October 2011 collapse of broker MF Global not the least of which.

A recent hiccup in the day-to-day at JP Morgan took place when the bank did not accept thousands of Knight-owned securities as Knight securities sought new financing. On Aug. 2, Knight informed JP Morgan it was looking to the bank to help arrange financing from Royal Bank of Canada as a so-called “tri-party” agent. This would have put JP Morgan at the center of an RBC loan to Knight. Before 5p.m., Knight transferred around 1,000 securities to a collateral account at JP Morgan at the Depository Trust & Clearing Corp., an industry clearinghouse that watched Knight’s finances during the period and kept securities regulators informed.
JP Morgan told Knight some securities were unreadable through databases used to reach valuations, and the bank refused anymore from Knight. Knight transferred 6,000 more securities  around 5:15pm, some of which JP Morgan also found unreadable. The bank also told Knight that it lacked formal instructions required for tri-party financing.
Of the 7,000 securities Knight sent JP Morgan, JP Morgan rejected over 4,000. JP Morgan and Knight executives argued over the phone late into the night. Knight accused JP Morgan of “dragging its feet” and the bank told Knight
Tensions between J.P. Morgan and Knight executives erupted in a series of phone calls late into the night, with Knight accusing J.P. Morgan of dragging its feet and the bank shooting back that Knight had jumped the gun in transferring the securities.

At 8 a.m. the next morning, Friday, the transfer of securities out of Knight’s J.P. Morgan-controlled account was complete, giving Knight full control of the securities it had sought to use in the financing. Knight informed RBC that the deal wasn’t going to happen, according to a person familiar with those discussions. Knight arranged other financing and opened for business.

On Sunday, Knight was closing in on a deal that would bring it $400 million from outside investors. That afternoon, Michael Cavanagh, co-chief executive of J.P. Morgan’s corporate and investment bank, signaled the go-ahead for a drawdown of Knight’s $200 million credit line. “We’re funding this,” Mr. Cavanagh said, according to people involved in the discussions. Knight drew down the facility and, after announcing the outside investment, opened for business Monday morning.

JP Morgan’s more conservative approach to this section of its overall business could spread to other Wall Street firms looking to stay at the forefront of risk management, thus impacting Wall Street’s money velocity.
To be sure, JP Morgan has yet to make its plans public, but it is rumored to involve scaling back services to some clients and denying all services to others. Indeed, JP Morgan has already stopped working with some clients.

JP Morgan’s Treasury and Securities Services business, in which clearing and settlement operations take place, makes good money for the US’s biggest bank.  Net income at the unit was $463 million in the second quarter, a 39% increase from the same quarter a year prior.  The unit madeup 9% of the bank’s $4.9 billion second-quarter profit and 9.4% revenue.

So, what went wrong during the Knight Capital deal? It appears that the derivative packages that are being swung around Wall Street are being so diluted and filled with nonsense that banks issuing these derivatives like cannon-fire at the global economy can’t even make sense of them. Value within value within value until something completely new is arranged, something unrecognizable.

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