On Sat, Aug 2, 2008 at 9:30 PM, Perelman, Michael <[EMAIL PROTECTED]> wrote: > What Brad says makes sense and is consistent with the press reports. > Roubini seems to have gone much further, suggesting that JPMorgan may > have been weak because of holding too much of Bear Stearns' junk. I > cannot imagine what he meant otherwise when he talked about JPMorgan's > counterparty risk. What am I missing? >
The conventional wisdom on BSC is that JPM was the only major bank that was relatively untouched by subprime writedowns (Citi has a big SIV and other problems, B of A has Countrywide to digest), so it was the obvious candidate to absorb BSC. There is however a minority opinion that suggests JPM is in nowhere near robust health and in fact the BSC bailout was mostly an attempt to prevent JPM from collapse from its huge derivatives book. Even back in 2003, there were many rumors about Chase becoming insolvent because of the size of its derivatives book. After the merger with JPM their exposure only increased. Roubini might have been referring to this possibility. Here's one example of the minority opinion on JPM: http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=266 -----------------------------------snip While JPM currently boasts the highest Tier One leverage ratio of the top three US banks by assets, in EC terms it appears to be the clear outlier in the marketplace with the highest levels of economic risk vs. capital of any large bank in the US -- with one exception: Commerce Bancorp (NYSE:CBH). The relatively large MBS holdings of CBH push its ratio of EC to Tier One RBC over 8:1 in the IRA Bank Monitor simulation. Why do we take such a dim view of JPM and the US banking sector generally? First, because the US real estate market is not yet even close to the bottom. Second, the commercial real estate and corporate credit sectors are being dragged down by the same deflationary forces that are causing the US economy to slow dramatically. When you consider that US real estate markets and bank loan losses are unlikely to bottom before this time next year, you begin to understand our bearish outlook. JPM has been lucky so far because its risk book is heavily weighted toward commercial rather than consumer risk, unlike our beleaguered friends at Citigroup (NYSE:C). But like last week's debacle involving BSC, the fast deteriorating situation at C could provide a catalyst that takes JPM down a couple of notches in the next few months. We hear in the risk channel that the internal situation at C is going from bad to worse as veteran Citi bankers are in near-mutiny against the new, two-headed management team imposed by regulators. Meanwhile, former CEO Chuck Prince, who is a consultant to C, is leading the discussions with regulators on behalf of the bank and is, in effect, acting as shadow chief executive of C. One insider predicts that the C annual meeting in several weeks time will be "very messy" and notes that acting Chairman Robert Rubin is nowhere to be seen. Keep in mind that C, JPM and many other large banks are still trying to get their arms around the full dimension of the risks facing their institutions, this even as bank loan default rates remain well-below long-term averages. All of the subsidiary banks of C, for example, reported 127bp of charge offs in 2007, a full 2 SDs above peer but well below 1991 loan loss levels. -- The first Christian gets the hungriest lion. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
