Nothing Is, But What Is Not (Shakespeare/Macbeth)

If you’ve got a business -- you didn’t build that. Somebody else made that happen - Barack Obama, July 13, 2012

You know, I have maintained for a long time that Barack Obama is the poster child for affirmative action.  That quote from a speech by him on Friday serves to reinforce my view.  If ever there was an apologetic statement for big Government, welfare and wealth redistribution, that is it.  I fell off my chair when I read that quote.  I guess everyone on field day gets a ribbon and now that policy has become firmly entrenched in our Government.  Barack Obama has had his entire career handed to him by others so I guess no one should be surprised that he made that remark.  What's sadly ironic is that, if you go by the income distribution numbers in our country since Obama was elected, it would appear that he is nothing more than a dish rag for the wealthy entitled, as an even greater percentage of income has trickled up to the 1% than before Obama was elected.

I had to sneak in a tribute to Shakespeare since I'm going to see the Colorado Shakespeare Company perform Richard III on Thursday evening in Boulder.  I've always loved that particular quote from Macbeth because it succinctly and cleverly encapsulates the idea of truth vs. appearance.  In fact, Obama is emblematic of form vs. substance.  He's all form and zero substance.

In a similar fashion, the existence and being of JP Morgan as a capitalistic enterprise also is the perfection of fiction vs. reality.  I recall that about 9 years ago, a good friend and colleague of mine and I discussed the fact that JP Morgan was littered with bad derivatives positions and off-balance-sheet debt and would eventually implode.  But we also knew that JP Morgan was the Fed's primary tool for manipulating the markets and because of that fact the public would never see the extent of which JP Morgan would be bailed out behind the scenes.  The TARP/Fed bailout of JP Morgan (and the other too big to fail banks) was just a glimpse of the bigger behind-the-scenes bailouts that are coming.

JP Morgan reported 67 cents per share earnings on Friday.  Of that, 45 cents was fully disclosed fictitious accounting gains.  I'll explain without delving in too deep.  12 cents of JPM's net income came from a neat little trick known as Debt Valuation Adjustment.  Essentially what this means is that the bonds issued by JP Morgan to raise money declined in market value last quarter (went up in yield).  So JP Morgan pretends that it goes into the market and buys back all of its bonds at a price level less than par (100), and therefore reaps income because they could have saved money buying them back below par rather than waiting until maturity and having to pay par.  Get it?  "What is not" about this bullshit little accounting fiction is that JP Morgan never purchased any bonds during the quarter.  It's 100% fictitious income.

The bigger source of income was 33 cents attributed to "loan loss depletion."  What this means is that JP Morgan accumulated charges to income over the past few years in anticipation of some of its loans and trading bets going bad over time.  For some reason, they decided they over-reserved for loan losses and therefore reduced the amount of loan loss reserves, which then gets translated into accounting (GAAP) income.  The charges to income over time were originally non-cash and the reversal of these charges are non-cash.  However, you have to ask yourself if the use of this loan loss reversal to generate paper income makes sense.  All of the too big to fail banks are using this gimmick to generate a lot of "income" over the past few quarters.

But let's see if it makes rational sense for JPM to do this.  What we know is that JPM incurred a $4.4 billion loss on its London derivatives bet, despite telling us a few weeks ago that the loss was $2 billion.  For me this raises a red flag and I've demonstrated in past  posts how JPM's position marks are fraudulent.  So let's assume this loss is only $4.4 billion.  It's a lot bigger and everyone I know who has worked on a trading desk - including me - knows that it is.  But what about all of its other derivatives bets and loan assets?  Are we supposed to give them the benefit of doubt and trust that all the other assets on and off balance sheet are accurately marked?  I think one would have to be supremely stupid or appallingly naive to believe that JP Morgan and its drunken CEO Jamie Dimon will ever tell us the truth about anything.  The truth is that JP Morgan's assets are hopelessly marked too high in value and the bank will eventually have to recognize massive losses.  They should not have been allowed to reverse their loan loss reserve like this because the facts to not match the action taken by JPM.

My point here is that JPM's earnings reports are completely fictitious and fraudulent.  And if I know this, it means that the people at JPM who are in upper management know this, Jamie Dimon knows this,  many JPM board members likely know this, Bernanke knows this and people in the Treasury and SEC with some modicum of intelligence know this (Geithner and Mary Shapiro are too stupid).  This gets back to the discussions about JPM that I used to have back in 2002 and 2003.  We knew JPM was technically insolvent back then.  Nine years later that level of insolvency is significantly higher by many multiples, which means the smoke being blown to cover it is substantially thicker.  And worse, the tax payer and middle class wealth being confiscated to keep JP Morgan from collapsing is unimaginably large.  This is why JP Morgan is being allowed to steal customer assets that were being used as hypothecated collateral at places like Lehman, MF Global and PFGBest.  This will get worse - expect it.