JPMorgan’s magical numbers

JPMorgan has just announced that its hedging losses that CEO Jamie Dimon had previously said were a “tempest in a teapot” are now $5.8 billion, up $3.8 billion from the previous announcement. “At most” he says, “any additional losses will be limited to another $1,7 billion from the bad credit trades.”

Happily, all this bad news coincides with what would have been the bank’s best quarter ever. The announced earnings per share (EPS) of $1.21 compares well with the previous record of $1.34 earned in Q1/2007. The effect of the hedging losses taken in the second quarter are $0.69. So without that extraordinary trading loss, the EPS would have been a record $1.90. Now that’s a happy coincidence.

After making the announcement of the increased loss and the quarterly profit JPMorgan’s shares rose by almost 6%.

Now we do know that in the next quarter there’s going to be another charge of up to $1.7 billion. But, if these numbers are real, then in the quarter after that, the business is going to be very profitable.

So the share price should have jumped a lot more.

Perhaps there are other people who are a little skeptical about the numbers.

More at:
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U.S. investigates whether JPMorgan traders hid losses
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SENIOR MANAGEMENT BIOGRAPHIES

Recent:
JP Morgan accused of hiding losses by Senate report

The wealth trap

When one looks at a balance sheet, the value of the business attributable to the shareholders is the difference between the assets and the liabilities, the net asset value (NAV). The market value (MV) of a listed company is the value attributable to the shareholders. For companies that are growing, profitable, and high-tech the MV is usually a lot higher than the NAV.

A large proportion of the difference is a function of the growth, and when that starts to drop off, even though the company is still very profitable, the MV drops.

So the senior executives cannot afford for growth to drop off, otherwise the shareholders lose money and that makes them unhappy.

High growth is normal in the early stages of a market. The same is true for a company with a smart idea coming into an established market. As the market becomes saturated and the smart company starts to dominate, growth naturally tails off. After that growth is dependent on price increases, which at some point starts to chase customers away.

When executives start running out of ideas to keep the growth going they sometimes resort to dishonesty.

There have been a few examples recently: Barclays and the other banks manipulating LIBOR. GlaxoSmithKline paying $3 billion fine for committing healthcare fraud.

One company’s growth falling off is an unhappy event. Many companies sharing that fate is a crash. That mythical wealth is what underpins the stock markets.  As long as we keep believing the myth, we’ll be fine.

Just don’t stop.

More at:
What Is the Difference Between the NYSE & NASDAQ in Terms of Market Capitalization of Stocks?
Corporate arrogance should be punished
The settlers
LIBOR manipulated – that’s a really big deal!

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A Diamond in the rough

As our earlier article explains, the deviation for some of the other banks reporting their LIBOR interest figures were worse those of Barclays. Robert Diamond, the former CEO of Barclays, has been making that point too.

His response is a little petulant: the others were also naughty, so why are we being punished?

Perhaps because in Barclays’ case there’s irrefutable proof.

But he does have a point. What is being done about the other banks?

The conversation between Mr Diamond and Paul Tucker of the Bank of England on October 29, 2008 that Barclays figures were higher than the others also raises some questions. Manipulation of LIBOR was already an issue after the Wall Street Journal published it’s proof in May 2008.

In that context, it seems improbable that Tucker’s query about the higher rates would be an attempt to induce the manipulation of LIBOR.

So far we don’t have the notes from the conversation between Mr Diamond and Jerry Del Missier, the former Barclays executive who took Tucker’s question as an instruction to manipulate the LIBOR figures.

Perhaps they don’t exist – anymore.

More at:
Diamond Says Rivals Lowballed Libor, Blames Regulatory Inaction
Barclays: MPs query Bob Diamond evidence
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Corporate arrogance should be punished

Bob Diamond, the CEO of Barclays, has resigned. Now he is claiming that he is being penalized for owning up first.

Perhaps he should revisit some of the other things he has said in the last few days. For example, that Barclays had acted as soon as senior management were aware of the manipulation. Now it appears that Mr Diamond was aware of the manipulation as early as 2008, and that he believed that Barclays was operating under instruction from Paul Tucker, deputy governor of the Bank of England. The conflicting stories suggest that Mr Diamond has not yet realized that lying is what caused this problem in the first place.

Barclays is being brought to book, but another large corporate is quietly slipping under the radar.

Wyndham hotels allowed hundreds of thousands of hotel customers’credit card details to be stolen from their computer systems in at least three breaches. The most basic security measures were not followed. The critical data was not encrypted. On a modern database encrypting the data is a matter of ticking a box.

Their defense: “They were unaware of any customers losing money as a result of the breach”.

Anyone who has had the experience of being defrauded will know that the perpetrators aren’t very communicative about where they obtained the credit card details. When it happened to me, my card had only ever been used for five transactions, none of them online. It wasn’t possible to figure out which purchase had exposed me to the fraud.

The lack of concern for customers is evidenced by the carelessness. That’s bad enough, but it’s their arrogance that deserves to be punished.

More at:
What did Bank of England say to Barclays about Libor?
The elusive truth about Barclays’ lie
Diamond Pays Penalty For Being First Mover In Libor Probe
Wyndham hotels face FTC complaint after multi-hack attacks
A spook speaks

Since this was originally published:
The settlers

Is Germany factoring Mediterranean Europe

Factoring is a form of finance. Until the late 20th century the industry suffered the stigma that companies resorting to factoring were heading for liquidation.

Factoring is secured financing: the factoring house purchases the borrower’s receivables, advancing 75% of the invoice value up front, and the remaining 25% when the debt is paid. The factor manages the debtors, for which it charges a fee, usually 1% of invoice value, plus interest on the advance at 7% over prime (the best rate that banks charge to risk free clients).

It’s expensive finance.

Once the factor has control of the receivables, it has control of the company’s destiny. If debtors do not pay on time, the cost of funding becomes prohibitive and eventually destroys the company.

When that happens, the fully secured factoring house converts the client’s liquidation into a handsome profit, purchasing the company’s assets at a fraction of their real worth.

In his thesis on the subject, this correspondent proposed that both parties would benefit if the factoring house used economies of scale to manage the receivables efficiently, not only preventing liquidation, but also making the company a success. The factoring house is also more profitable as it turns its facilities over faster. The client’s funding requirements are reduced, minimizing the interest costs.

The factoring house that employed the young author proved the theory in practice.

Today, the Mediterranean countries are in financial distress. Greece is insolvent. Spain and Italy’s banks are in trouble, with both countries badly indebted. Spain is running deficits. Italy’s industries are no longer competitive.

Early in the crises a German tabloid suggested a solution to Greece’s crises: “Sell us your islands”.

The band-aid solutions that have been used so far provide secured loans to the three countries at high interest rates. The conditions of the loans demand austerity, to remedy the profligacy that precipitated each country’s crises. As the inflicted measures bite, their economies contract, reducing tax revenues, and making repayment of the loans and interest increasingly difficult. The accusations of profligacy are legitimate, but austerity is not the answer.

The solution is to create a European banking union, with a Europe-wide bank-deposit insurance scheme. A ‘fiscal union’ in which all or part of the national debts are mutualised as joint Eurobonds would stop markets pushing sovereigns into insolvency, and would create a European asset that banks could hold. Moreover, if these were financed through federal taxes Eurobonds would be even more of a safe asset.

The ECB should be given independence from the politicians to provide the kind of solutions that the Fed and the Bank of England provide to their respective economies.

The most recent Eurozone deal is another band-aid. Instead of lending money to the country, loans will be made to their troubled banks. While this is an improvement over previous arrangements, it’s not a real solution.

Germany’s resistance to Eurobonds and a fiscal union has financial logic. At present the country’s most recent bonds are offering a yield close to zero. That makes it very cheap for Germany to borrow money. And while the Euro looks at risk, instead of rising, the exchange rate remains low, offering Germany’s products to the world at a discount. As the world’s second biggest exporter, the German manufacturers are enjoying the windfall.

Apparently the German constitution prohibits a Euro fiscal union and Eurobonds. If the country’s leaders wanted to pursue that course, they could be promoting the necessary constitutional amendments. Angela Merkel has said “over my dead body”.

Should the Mediterranean countries fail, those islands and beaches, with the houses overlooking them could be on sale at a big discount to those with the money.

Whether it’s intent, or bad judgement, it will still be the same. The rich get rich and the poor get………. austerity.

More at:
First loss is the best loss
Austerity – what does that mean?
A glimmer of hope!
Merkel defends compromise deal on eurozone banks
The future of the European Union (part 1) Soviet collapse or Germanic reform?
The future of the European Union (part 2) Don’t count on a Hamiltonian moment
EUROPEAN COUNCIL Brussels, 29 June 2012
Babies and bathwater
Europe on the rack