JP Morgan Cold Feet Over Risk
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.
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 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.