To the astonishment of many, a Senate committee criticized a bank:
JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon sought to hide escalating trading losses that surpassed $6.2 billion, misled investors and dodged regulators as a “monstrous” derivatives bet deteriorated last year, a Senate probe found.
The largest U.S. bank “mischaracterized high-risk trading as hedging,” and withheld key information from its primary regulator, sometimes at Dimon’s behest, according to a report yesterday by the Senate Permanent Subcommittee on Investigations. The 301-page document also shows how managers manipulated internal risk models and pressured traders to overvalue their positions in an effort to hide growing losses in a credit derivatives portfolio in London.
“We found a trading operation that piled on risk, ignored limits on risk taking, hid losses, dodged oversight and misinformed the public,” Chairman Carl Levin, a Michigan Democrat, told reporters yesterday after his investigators spent nine months combing through 90,000 documents and interviewing current and former executives.
The full report is available on the committee’s website. The conclusion is fore-ordained:
The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks lose big, may be required to finance multi-billion-dollar bailouts.
However, there are points of interest for the connoisseur. It appears that gross incompetence in back- and mid- offices is still just as much a problem as it ever was:
For five days, from March 12 to 16, 2012, Mr. Grout prepared a spreadsheet tracking the differences between the daily SCP values he was reporting and the values that would have been reported using midpoint prices. According to the spreadsheet, by March 16, 2012, the Synthetic Credit Portfolio had reported year-to-date losses of $161 million, but if midpoint prices had been used, those losses would have swelled by another $432 million to a total of $593 million.
…
One result of the CIO’s using more favorable valuations was that two different business lines within JPMorgan Chase, the Chief Investment Office and the Investment Bank, assigned different values to identical credit derivative holdings. Beginning in March 2012, as CIO counterparties learned of the price differences, several objected to the CIO’s values, resulting in collateral disputes peaking at $690 million. In May, the bank’s Deputy Chief Risk Officer Ashley Bacon directed the CIO to mark its books in the same manner as the Investment Bank, which used an independent pricing service to identify the midpoints in the relevant price ranges. That change in valuation methodology resolved the collateral valuation disputes in favor of the CIO’s counterparties and, at the same time, put an end to the mismarking.
…
According to Ina Drew, the large collateral disputes generated a series of questions internally about the CIO’s valuation process. She told the Subcommittee that Jamie Dimon “felt that one way to find out [about the validity of the disputes] was to ask [head of the CIO’s International Office] Mr. Macris, [head of the CIO’s equity and credit trading operation] Mr. Martin, and [senior CIO trader] Mr. Iksil to narrow the bid-offer spreads.
Two months to resolve a collateral deficiency? and at J.P. Morgan, collateral disputes being resolved by the trading department? Ridiculous.
Westjet hopes to have seen the last of Ottawa’s golden boys:
Competitor WestJet Airlines Ltd., which has a very different pension structure based on share purchase plans rather than Air Canada’s more traditional pension packages, opposed the arrangement. “While we recognize this has been a difficult decision for the government, we are disappointed with this announcement,” said WestJet president and chief executive officer Gregg Saretsky.
“We are supportive of a strong and competitive aviation industry in Canada. To that end, we trust this marks the end of special treatment for Air Canada as such treatment at the expense of other industry players has become too common,” he added in a written statement.
They (and we) will be lucky. Air Canada isn’t good at much, but it is good at sucking federal arse.
Capital Power Corporation, proud issuer of CPX.PR.A, CPX.PR.C and the new CPX.PR.E, was confirmed today at Pfd-3(low) by DBRS:
DBRS has today confirmed the ratings of the Preferred Shares of Capital Power Corporation (CPC or the Company) at Pfd-3 (low) with a Stable trend. CPC’s preferred shares rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB). The one-notch differential in the ratings of CPC and CPLP reflects structural subordination at CPC, which is largely dependent on its own resources and dividends from CPLP. Dividends from CPLP could be curtailed if the viability of CPLP needs to be safeguarded.
…
CPC has no debt issued at the parent level and is not expected to issue any debt in the foreseeable future. In March 2013, CPC issued $200 million of preferred shares, with the net proceeds (approximately $194 million) to be lent to CPLP to repay the outstanding balance under its credit facilities and to finance growth projects, including the Shepard Energy Centre. Pro forma the $194 million issuance, CPC will have $462 million of preferred shares outstanding, $131 million of which is treated as debt by DBRS in CPC’s adjusted debt-to-capital calculation (with a pro forma adjusted debt-to-capital ratio of approximately 6%). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferreds and minority interest) is treated as debt. CPC’s adjusted debt-to-capital ratio remains in line with its rating category. In addition, the pro forma unconsolidated fixed charge coverage ratio is expected to remain high, at above five times.
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets down 8bp and DeemedRetractibles off 1bp. Volatility was minimal, but the floaters continue their usual gyrations. Volume was average.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0269 % | 2,615.0 |
| FixedFloater | 4.11 % | 3.45 % | 31,310 | 18.37 | 1 | -0.5168 % | 3,954.6 |
| Floater | 2.55 % | 2.84 % | 88,192 | 20.16 | 5 | -0.0269 % | 2,823.5 |
| OpRet | 4.82 % | 3.28 % | 56,987 | 0.46 | 5 | 0.0311 % | 2,598.7 |
| SplitShare | 4.28 % | 4.00 % | 719,575 | 4.22 | 4 | 0.2778 % | 2,943.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0311 % | 2,376.3 |
| Perpetual-Premium | 5.20 % | 1.80 % | 87,725 | 0.13 | 31 | 0.0300 % | 2,358.5 |
| Perpetual-Discount | 4.84 % | 4.83 % | 154,227 | 15.79 | 4 | -0.2028 % | 2,660.9 |
| FixedReset | 4.89 % | 2.64 % | 289,627 | 3.31 | 80 | -0.0758 % | 2,513.0 |
| Deemed-Retractible | 4.87 % | 2.23 % | 136,940 | 0.44 | 44 | -0.0123 % | 2,444.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.C | Floater | -2.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-14 Maturity Price : 18.01 Evaluated at bid price : 18.01 Bid-YTW : 2.91 % |
| FTS.PR.H | FixedReset | -1.07 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.91 Bid-YTW : 2.63 % |
| TRI.PR.B | Floater | 1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-14 Maturity Price : 23.95 Evaluated at bid price : 24.20 Bid-YTW : 2.13 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.T | FixedReset | 60,778 | TD crossed 50,000 at 26.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-24 Maturity Price : 25.00 Evaluated at bid price : 26.61 Bid-YTW : 1.97 % |
| TRP.PR.D | FixedReset | 55,096 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-14 Maturity Price : 23.29 Evaluated at bid price : 25.61 Bid-YTW : 3.55 % |
| HSB.PR.E | FixedReset | 54,470 | Desjardins crossed 16,200 at 26.37; RBC bought 19,800 from National at 26.40. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.37 Bid-YTW : 2.06 % |
| RY.PR.X | FixedReset | 39,150 | Scotia crossed 34,600 at 26.63. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-24 Maturity Price : 25.00 Evaluated at bid price : 26.63 Bid-YTW : 1.92 % |
| PWF.PR.S | Perpetual-Discount | 38,185 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-14 Maturity Price : 24.62 Evaluated at bid price : 25.01 Bid-YTW : 4.81 % |
| ENB.PR.T | FixedReset | 27,588 | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.68 Bid-YTW : 3.55 % |
| There were 34 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.C | Floater | Quote: 18.01 – 18.51 Spot Rate : 0.5000 Average : 0.3357 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 25.91 – 26.28 Spot Rate : 0.3700 Average : 0.2273 YTW SCENARIO |
| PWF.PR.O | Perpetual-Premium | Quote: 26.66 – 26.96 Spot Rate : 0.3000 Average : 0.1988 YTW SCENARIO |
| ENB.PR.A | Perpetual-Premium | Quote: 26.23 – 26.49 Spot Rate : 0.2600 Average : 0.1753 YTW SCENARIO |
| ENB.PR.B | FixedReset | Quote: 25.88 – 26.10 Spot Rate : 0.2200 Average : 0.1380 YTW SCENARIO |
| BNS.PR.R | FixedReset | Quote: 25.55 – 25.76 Spot Rate : 0.2100 Average : 0.1312 YTW SCENARIO |