As part of its examination, the Fed is looking at institutions’ own stress-testing to see why they came up with different results. Officials projected a $32.3bn loss at JPMorgan in the hypothetical scenario compared with the bank’s own projection of a loss of just $200m.Lets just face it, if one person says something is worth 10 cents and another says its worth $1.5 million there clearly is something suspect.
Opinion 1: Now if we put in perspective the particular intelligence that thinks JPM could lose $32.3 billion of its $250 billionish in reserve capital happens to be one that missed the housing bubble, does not understand just how badly they have destroyed the economy and markets with QE and has gotten nearly every financial projection wrong for the last 20 years…that could be interesting. Now, this particular intelligence is usually underestimating anything that it does not like and over estimating anything that its fond of…and they think JPM can lose $32.3 billion?
Logic would have it that a second opinion might be necessary, therefore, we turn to the intelligence with the greatest knowledge of derivatives, modelling and financial engineering that there is.
Opinion 2: They project a maximum loss of $200 million of reserve capital. HMMMMM. Might this particular organization be doing an optimistic self assessment? If you guessed “Yes” you would be correct. They are…but their models for VAR varied by 10’s of billions in losses versus imaginary profits and when implemented the head of CIO failed to do a simple regression analysis to see how the new modelling looked as per the last 10 years of historical trading that they had actually done…they did not even look back 1 year. This company estimated losses at 1 billion, then 2 billion then 3 billion then waited and suggested they would double again in the London Whale saga... yet this company thinks they will only lose $200 million in the self assessment of their stress readiness.
THIS IS NOT GOOD.
The opinions above are lousy and both done by self interested parties, the FED for opinion 1 and JPM for opinion 2. If the Fed thinks JPM could lose $32 billion we should increase that estimate to at least $120 billion. This, however, would decimate the reserves that JPM needs to support the demand deposits by its customers…of which there are 2.7 trillion.
So, clearly they would not have sufficient funds to handle withdrawals, moreover, there is no way they have sufficient funds NOW in my view. Right now, if every customer at JPM were to demand their deposit, they might get 12 cents on the dollar based on their simple reserves to deposits…however, given the above demonstration of inability, we need to take into account all the rotten assets, bad assumptions, bad calculations, bad models and bad securities that they hold but do not reflect. Additionally, we need to take into account the $79 trillion of derivatives that JPM would need to unwind. The process of unwinding those securities would likely ellicit losses in the trillions from spread alone - which would, therefore, award its valued customers with ZERO cents on the dollar above the FDIC guarantee…which would likely be paid out over many years.
Cyprus is here already. It is in the US. Ben BURNanke does not even attempt to deny this but rather to obfuscate…and its living in the biggest and supposedly “Too Big To Fail-est” institutions which clearly have very troubling analysis and mathematics deficiencies. The question is simply “When?”
More importanbtly, however, where’s the "best modelling award" panel…they should be generously offering awards to all these institutions any minute now.