Breakout

JPMorgan Earnings & Conference Call: Everything You Need to Know!

Jeff Macke
Breakout

JPMorgan Chase's (JPM) earnings report arrived Friday, but this time investors were more interested in the details of the "London Whale" trading losses than they were on the quarterly operating numbers.

The bank now says it had $4.4 billion of credit trading losses from its Chief Investment Office, but officials report that they've "cleaned up" the group that made the bad trades.

Overall, JPMorgan still had a second-quarter profit approaching just under $5 billion, down from $5.43 billion in the year-ago period. On a per-share basis, earnings dropped to $1.21 from $1.27.

Breakout was live-blogging the call, with Jeff Macke leading the way on our coverage and offering his perspective as it unfolded. Check out everything you need to know below!

*****

It's all in the call. (Note: questions and answers are paraphrased unless otherwise noted)

7:48: Dimon: "We'd like to buy back stock" but can't because the Fed won't let them until JPM has done a full review of the "accident" (Dimon's term).

Dimon is back on top of his game, sharp contrast to May 10th.

7:48: JD: We have a great management team "all of whom are sorry to have missed this thing". Well, as long as they're sorry...

7:50: "Isolated event" ... "we learned a lot" ... "redoubled our efforts" ... "we operate in a risk business" ... "we have great franchises" ... "we have an endless reserve of platitudes" (last comment mine)

7:53: JPM Restating Q1 earnings do to "questioning the integrity of trader marks." No answer as to how this impacts CIO operations prior to discovery of fraud. In the May 10th call Dimon said CIO had unrealized gains of roughly $8b. Is that number real? Does JPM have any idea?

7:54: CFO running through underlying operations. Obviously no one is on this call to hear about ongoing ops.

7:59: Still running through slides. It's almost as if the company is trying to throw listeners off the track of what may have been actually happening. Or a game effort to keep investors focused on the future. Six of one, half dozen of another.

8:01: Auto loans up 7%. Hmmm ... lagging auto sales growth unless I'm mistaken (which is possible)

8:17: Primary purpose of the CIO group was as a "hedge". Obviously, clearly, brazenly that's not what the CIO was doing at the end ... regardless of which JPM claiming CIO had profits in prior years ending 2011. You know, as far as what was reported internally.

8:17: Still running through the mind-numbing slides of fog

8:19: Slide detailing the CIO trade. Bad Trading Psych 101 tantamount to: "we made a lousy trade and thought we could get out of it by a) refusing to take the loss b) increasing the size of the bet".

8:21: Fun background on stupid trades: What JPM did was is something like the Martingale gambling strategy where losing bets are doubled until profits are made. This is a dumb strategy and how famous lover Casanova ended up going bankrupt. For more see here.

8:24: JPM dragging former CIO head Ina Drew out from under the bus then throwing her back under it.

8:27: STILL running through slides. 9 slides of facts. I could run through other stuff I know about Casanova but if I do that would be letting the distraction tactics win.

8:29: Blaming lack of scrutiny on an increase of complexity and, yet again, Ina Drew who perhaps lacked the sophistication to understand the unimaginably complicated efforts of the Whale and co's efforts to obfuscate losses until the money could be recovered (see: Martingale, above)

8:31: To their considerable credit, JPM is absolutely crushing themselves and their systems for controlling losses and understanding their portfolio. In the past-tense but still ... .

8:33: Value at Risk (VaR), a measure intended to estimate potential losses, being wildly adjusted and increased in the wake of the mess. Though JPM conceding that even the new system wouldn't have caught the losses in real time.

8:36: "... on slide 17..." Where's my hemlock?

8:37: JPM Management is convinced this is an "isolated failure" and management is and always has been focused on risk management (spit take)

8:39: Going to go ahead and get the Q&A started by asking it's own questions which, conveniently, already have accompanying slides.

8:40: Clawbacks! All management in London CIO is gone and will see money clawed back as much as two years of compensation. Ouch.

8:41: "Compensation determinations" ("Jamie will cover Ina"… oh oh)… for 2012 will include normal business process.

8:43: Jamie on Ina: "Enormous respect for her as a profession and person"…. "when she decided to retire… (sic)"… She offered to give up maximum claw back amount. Dimon not ripping her at all, on the surface

8:45: Q & A

8:46: Post CIO operations what's earnings power ex the $2b made by CIO over the last 3 years?

Dimon: Earnings power unaffected and now "Unburdened" by mortgages.

8:47: Dimon: CIO exposure down from $12b to $6b… "which we think is pretty good"

8:46: Q: "What's left" on the CIO book? Dimon: "… it doesn't 'have' to love money at all" but he chucks $6b total out as a worst-case figure

8:47: Another Q about ongoing earnings power…? Dimon responds with just a wee bit of surly "This will not affect the earnings power of the company at all"

8:48: LIBOR Q Dimon: "We're totally open to investigators… wouldn't make too many assumptions at this point"

8:51: Q: Underlying trends look good yet the economy seems to be horrible. What gives? Dimon: "underlying economy not that bad". Also gaining market share.

8:53: Q: How long until resumption of the buyback? Dimon: We'll know on Monday and re-submit for approval. By the full quarter we should be buying back stock. Dimon: "I think our stock is a great buy"

8:56: Q: "Have you (Dimon) lost a step?" Chuckling ensues... presumably as Dimon's minions make plans to send a dead fish wrapped in a bullet proof vest to the analyst's family.

8:57: Dimon saying most of the things CIO was trading would be traded on any exchange. Which is sort of true, totally beside the point and actually makes the problem worse inasmuch as anything you can buy on an exchange would be easy to price in real time, thus suggesting the lack of oversight going on at JPM was less than than which most individuals apply to watching their brokerage accounts.

9:01: Mood Check: Dimon is scrappy as hell. You can all but see him dancing on his toes, eyes fixed on the speaker phone in macho defiance.

9:02: Q: How do we gauge past earnings in light of the fact that the CIO seems to have been making up numbers all along? Dimon and Crew: In effect... don't sweat it.

9:04: Q: Do you have specific controls separating communications b/n derivative traders and LIBOR activities? Dimon: "We're not going to comment" (that stuff about "Mood Check" above doesn't apply here)

9:08: Q: Was risk management lousy all along or did it get that way over time and, as a follow up, is the new VaR model worth a crud? A: (Not in JPM comfort zone): We already said we're sorry, new VaR is much better.

9:10: Dimon: "We don't run a business of models" VaR is only a tool and it's backward-looking. We use lots of tools and we mis-used the ones we have.

We need a "belts and suspenders" approach to risk management. The suspenders keep their pants up and the belt would be used as a way to.... (self-edited snark)

9:11: Q: Ok… so what the hell was the deal on why you used models like that in the first place and how have you changed? A: (CFO): The changes involved how we execute and getting synched up across the firm in terms of how we look at this.

Dimon: "We do extensive stress testing… we do 100's of stress tests". Testing more important than models.

9:14: Q: If we have a flat yield curve for the foreseeable future how are you going to make money? A: Dimon: Not a problem… the flat curve is reflected in current numbers… we'd make more w/ a better curve but we're cool with how it is.

9:18: A few more questions... analysts running out of steam... Dimon and co can't be heard high-fiving in the background but I don't doubt they are doing so. They've got to be pleased with how this has gone so far.

9:20: Q: Did compensation structures contribute to the CIO trading behavior? A: Naah [begging the question why the clawbacks... just a punishment? Appeasing the pitchfork and torch masses?]

9:21: Dimon: "Business in Europe and Asia is down.... America remains to be seen"

9:22: Q: (self-described "long-suffering" professional investor) The CIO is only the latest in a huge line of scandals... "What has to happen to get the board to conclude JPM is too big to manage and why don't we just break-up" (paraphrased)? A. Dimon: "I beg to differ"... immediately jumps into defense of conglomerate banking, calls splitting up short-term thinking. "If the board ever thought there were better strategies that would be considered at the time"

9:25 Q: (follow up from same guy). If CIO weren't part of such a huge bank would it have gotten the attention it needed? A. Dimon: Lot's of banks go bankrupt... plenty of ideas fail... dreams are nothing but a fist full of dust, waiting for a stiff breeze or failure of muscle to cast them into the winds of fate... then a real quote: "CIO was a mistake and we're sorry"

9:27: Q: Another pass at LIBOR How long will LIBOR be an issue, what's going on, can you please tell us something? A: Dimon: "we have no special insight, ok?" [long silence followed by next question].

LIBOR is quite clearly not going to be discussed today.

9:28: Q: Do the regulators have the same about confidence in the way you control your risks now? A: We don't know but we've worked with them and they'll come to their own conclusions.

9:30: Q: How are you planning to compensate CIO now? A: a bunch of boilerplate on current best practices for setting compensation with long-term shareholder interest in mind...

9:31: Q: Should we expect more vol now that you have less hedging? A: Dimon, worked up for the first time in about 20 minutes (paraphrased): No, you won't see more vol. It's a highly rated body of positions. Don't make me stop this call and take you outside. We no longer hedge but we don't have risk, making it clear we didn't hedge in the first place but I'm not going to say that because it would look sort of bad (again... paraphrased)

The End: Dimon: "Thanks for spending some time with us. Better news next time" We love you New York. We're Jamie and the Diamonds... Peace Out!

Epilogue:

Very, very well handled by JPM and crew. The call went as well as it possibly could have gone, given the unpleasant facts at hand. If Jamie Dimon is no long the Prince of Wall St it's not because of anything he said today.

Going forward LIBOR is huge, the CIO trainwreck has been diffused to the point that it's off the front page and back into the deepest portions of the WSJ and Financial Times. Not likely to spark a huge rally in financials but more than enough to turn the problem from acute to a chronic issue of risk management for JPM and others.

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