Posts Tagged ‘JP Morgan Chase’

JP Morgan Chase’s $2 Billion Loss Under Investigation

Monday, May 21st, 2012

As the Department of Justice and the FBI open their investigation into how JP Morgan Chase lost $2 billion, the government is investigating to determine if any criminal wrongdoing occurred.  The inquiry is in the preliminary stages.  Additionally, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which regulates derivatives trading, are also looking into JPMorgan’s trading activities.  JPMorgan CEO Jamie Dimon said that the bank made “egregious” mistakes and that the losses tied to synthetic credit securities were “self-inflicted.”

The probe is perceived as necessary, given the ongoing debate about bank regulation and reform, and one expert said it raised the level of concern around what happened.  “The FBI looks for evidence of crimes and goes after people who it alleges are criminals.  They want to send people to jail.  The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI,” said Erik Gordon, a professor in the law and business schools at the University of Michigan.

According to Treasury Secretary Timothy Geithner, the trading loss “helps make the case” for tougher rules on financial institutions, as regulators implement the Dodd-Frank law aimed at reining in Wall Street.  Geithner said the Federal Reserve, the SEC and the Obama administration are “going to take a very careful look” at the JPMorgan incident as they implement new regulations like the “Volcker Rule,” which bans banks from making bets with customers’ money.  “The Fed and the SEC and the other regulators — and we’ll be part of this process — are going to take a very careful look at this incident and make sure that we review the implications of what that means for the design of these remaining rules,” Geithner said.  Under review will be “not just the Volker Rule, which is important in this context, but the broader set of safeguards and reforms,” Geithner said, noting that regulators will also scrutinize capital requirements, limits on leverage and derivatives markets reforms.  “I’m very confident that we’re going to be able to make sure those come out as tough and effective as they need to be,” Geithner said.  “And I think this episode helps make the case, frankly.”

Geithner said that Dodd-Frank wasn’t intended “to prevent the unpreventable in terms of mistakes in judgment, but to make sure when those mistakes happen — and they’re inevitable — that they’re modest enough in size, and the system as a whole can handle them.”  The loss “points out how important it is that these reforms are strong enough and effective enough,” he said.

With the passage of Dodd-Frank, banks are required to hold more capital, reduce their leverage and assure better cushions across the financial system to accommodate losses.  Geithner’s comments are similar to those made by other White House officials, who have avoided blasting the bank for its bad judgment, and instead used the event to bolster the case for the financial overhaul.

“We are aware of the matter and are looking into it,” a Justice Department official said “This is a preliminary look at what if anything might have taken place.”  The inquiry by the FBI’s financial crimes squad is in a “preliminary infancy stage,” the official said, and federal law enforcement agents are pursuing the matter “because of the company and the dollar amounts involved here.”

JPMorgan’s and the financial system’s ability to survive a loss that large showed that reforms put in place after the 2008 financial crisis have succeeded.  Nevertheless, the loss by the nation’s largest bank highlights the need for tough implementation of the Volcker Rule on proprietary trading and other rules that regulators are still finalizing.  “The whole point was, even if you’re smart, you can make mistakes, and since these banks are insured backed up by taxpayers, we don’t want you taking risks where eventually we might end up having to bail you out again, because we’ve done that, been there, didn’t like it,” according to President Obama.

Mark A. Calabria, Director of Financial Regulation Studies for the Cato Institute, takes a contrarian view.  Writing in the Huffington Post, Calabria says that “Unsurprisingly, President Obama and others have used the recent $2 billion loss by JPMorgan Chase as a call for more regulation. Obviously, our existing regulations have worked so well that more can only be better!  What the president and his allies miss is that recent events at JPMorgan illustrate how the system should — and does — work.  The losses at JPMorgan were borne not by the American taxpayer, but by JPMorgan.  The losses also appear to have been offset by gains so that in the last quarter JPMorgan still turned a profit.  This is the way the system should work.  Those who take the risk, take the loss (or gain).  It is a far better alignment of incentives than allowing Washington to gamble trillions, leaving someone else holding the bag.  The losses at JPMorgan have also resulted in the quick dismissal of the responsible employees.  Show me the list of regulators who lost their jobs, despite the massive regulatory failures that occurred before and during the crisis.

According to Calabria, “President Obama has warned that ‘you could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in.’  Had to step in?  What the recent JPMorgan losses actually prove is that a major investment bank can take billions of losses, and the financial system continues to function even without an injection of taxpayer dollars.  It is no accident that many of those now advocating more regulation are the same people who advocated the bailouts.  Banks need to be allowed to take losses.  The president also sets up a ridiculous standard of error-free financial markets.  All human institutions, including banks and even the White House, are characterized by error and mistake.  Zero mistakes is an unattainable goal in any system in which human beings are involved.  What we need is not a system free of errors, but one that is robust enough to withstand them.  And the truth is that the more small errors we have, the fewer big errors we will have.  I am far more concerned over long periods of calm and profit than I am with periods of loss.  The recent JPMorgan losses remind market participants that risk is omnipresent.  It encourages due diligence on the part of investors and other market participants, something that was sorely lacking before the crisis.”

One Solution to Rundown Foreclosed Houses? Bulldoze Them

Wednesday, August 17th, 2011

Several banks have found a new solution to the glut of foreclosed houses – many of them in poor condition.  It’s the bulldozer. Bank of America (BoA) owns a glut of abandoned houses that no one wants to purchase.  As a result, the nation’s largest mortgage servicer is bulldozing some of its most uninhabitable inventory.  Additionally, Wells Fargo, CitiCorp, JP Morgan Chase and Fannie Mae have been demolishing a few of their repossessed houses.  BoA is donating 100 foreclosed houses in the Cleveland area and in some cases will contribute to the cost of their demolition in partnership with a local agency that manages blighted property.  The bank has similar plans impacting houses in Detroit and Chicago, and more cities tare expected to be added.

“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corporation, which works with lenders, government officials and homeowners to salvage abandoned homes.  “The best thing we can do to stabilize the market is to get the garbage off.”  Detroit mayor Dave Bing is in the process of ” right-sizing” the motor city by razing entire neighborhoods.

BoA plans to donate and bulldoze 100 houses in Cleveland, 100 in Detroit, and 150 in Chicago.  The lender will pay up to $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program.  Uses for the land include development, open space and urban farming.  “No one needs these homes, no one is going to buy them,” said Christopher Thornberg, founding partner at the Los Angeles office of Beacon Economics LLC.  “Bank of America is not going to be able to cover its losses, so it might as well give them away and get a little write-off and some nice public relations.”

Some foreclosed properties are so uninhabitable that the bank is willing pay to have them destroyed.  A bank spokesman said some in this category are worth less than $10,000.

Writing in The Atlantic, Daniel Indiviglio says that “The motivation here is pretty straightforward.  They get out of ongoing maintenance costs and taxes that they would have to pay as long as the property remains on the market.  But the even better news is that the banks can often write-off these properties as a result.  In some cases, banks can deduct as much as the homes’ fair market value from their income taxes.  From the real estate market’s standpoint this strategy is also positive.  With less supply, prices will stabilize more quickly.  Disposing of these foreclosures will make the market clear sooner.  And yet, the idea of bulldozing homes does seem rather unsavory, does it not?  Perhaps some of these homes are condemned and/or beyond repair.  In those cases, it might turn out to be more expensive to try to get them back up to code than it would be to knock them down and start over.  But does this really describe all of the cases?  This is reportedly happening to thousands of homes across the U.S.  My concern is that banks are using this as an easy out to minimize their loss with little concern about what’s best for the U.S. economy.  If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.”

According to a Time magazine article,  “After multi-billion dollar legislative efforts in the form of the Stimulus, Dodd-Frank and stand-alone legislation, President Obama declared failure earlier this month and said he’s going back to the drawing board on a housing fix.  Negotiations between the 50 state attorneys general and the big mortgage lenders, rather than clearing the air for banks and borrowers, has become an enormous wet blanket as negotiations drag out and banks refuse to make any move without knowing how much of the reported $20 billion settlement will fall on them.  Economists argue that the failure to clear the housing market is a primary cause of the stunted recovery: continued household debt weighs on consumer spending, home ownership and excessive debt puts a drag on labor mobility, and banks fear the consequences of increased lending.”

It’s the Jobs, Stupid.

Wednesday, February 16th, 2011

President Obama recently took a short stroll from the White House and through Lafayette Park to give a speech in what might be termed enemy territory – the U.S. Chamber of Commerce. The subject was jobs and what the Chamber can do to jump start hiring by the companies that form its membership.  Noting that American companies are sitting on approximately $2 trillion in cash, the president challenged the Chamber to invest some of that money by hiring Americans who are out of work.

“Many of your own economists and salespeople are now forecasting a healthy increase in demand.  So I want to encourage you to get in the game,” Obama said, referencing the tax credits his administration negotiated to spur new investments.  “As you all know, it is investments made now that will pay off as the economy rebounds.  And as you hire, you know that more Americans working means more sales, greater demand and higher profits for your companies.  We can create a virtuous cycle.  Not every regulation is bad; not every regulation is burdensome on business,” he said.  “Moreover, the perils of too much regulation are matched by the dangers of too little.”

Relations between the president and the Chamber – one of the nation’s most powerful lobbying groups — have been chilly and the speech was an effort to find common ground.  Since the Democrats’ defeat in the November mid-term election, Obama has been trying to mend fences with big business.  One part of that strategy was to hire Bill Daley, a former Chamber board member and JP Morgan Chase executive, as his new chief of staff to replace Rahm Emanuel.  Additionally, he named General Electric CEO Jeffrey Immelt to head an economic advisory panel dedicated to job creation.  According to the president, “I will go anywhere anytime to be a booster for American business, American workers and American products, and I don’t charge a commission.”  

The Chamber gave the president a warm welcome, with the organization’s president Thomas Donohue expressing the body’s “absolute commitment” to working with the White House on turning around the economy and creating new jobs.  “Our focus is finding common ground to ensure America’s greatness in the 21st century,” he said.  “America works best when we work together.”

The president’s remarks came on a day when several Illinois firms warned that they are planning to lay off employees or close facilities. For example, Kmart is planning to close several stores in Illinois.  Gold Standard Baking, Inc., will close a commercial bakery in Chicago, slashing 73 jobs.  Another 67 employees are likely to be laid off at Itasca-based C. D. Listening Bar Inc., which sells DVDs, CDs, books and video games online at  AGI North America, LLC, a paperboard box manufacturing company in Jacksonville, is closing at the end of March, putting 70 employees out of work.  Gray Interplant Systems, Inc. – a warehousing and storage company in Peoria and Mossville – is planning to lay off 167 employees in April.

So why are American companies not hiring – or not hiring on their home turf?  According to the Chamber’s Donohue, it’s a variety of reasons, including new regulations contained in the Patient Protection and Affordable Care Act and the Dodd-Frank financial reform bill. Additionally, companies are holding onto their cash to fund future acquisitions.  Consolidation makes new regulatory burdens easier to bear.  Once companies’ regulatory costs are clear and under control, they can begin hiring, he said.  Finally, demand remains relatively low.  Once spending improves, the Chamber believes that companies will have no choice but to invest in additional personnel to meet that demand.  As consumer and business spending grows, so should jobs.

And, the jobs are going elsewhere. The Economic Policy Institute, a Washington think tank, says American companies created 1.4 million jobs abroad in 2010, compared with less than 1 million in the United States. The additional 1.4 million jobs would have cut the unemployment rate to 8.9 percent, according to Robert Scott, the institute’s senior international economist.

Half of Americans Worry About Making Mortgage Payments

Tuesday, November 9th, 2010

Approximately 53 percent of all Americans are concerned that they will not be able to pay their mortgage or rent.  A recent Washington Post poll found that 53 percent of all Americans are concerned that they will not be able to pay their mortgage or rent, despite the fact that they believe the economy has shown some improvement since the dark days of 2008.  The worry is driven by slow job creation, said Karen Dynan, who served as a Federal Reserve economist and on George W. Bush’s Council of Economic Advisors.  According to Dynan, “The unemployment rate is still very high, so if you think of it as being about the odds of someone losing their job and not being able to find another there’s good reason to be concerned about being able to make mortgage payments,” according to Dynan, who is now co-director of economic studies at the Brookings Institution.

More than half of Americans want the Obama administration to impose a moratorium on foreclosures on homeowners who are unable to make payments.  The president and his economic advisors oppose the idea, saying it is dangerous to a housing market that is still on shaky ground.  The push for a moratorium is driven primarily by people’s worries about personal finances and the economy as a whole.  Not surprisingly, the people most worried about making their payments are strong supporters of the moratorium.  Compounding the situation is the fact that several lenders – notably Bank of America, JPMorgan Chase and Ally Financial – were found to have significant errors in some of their foreclosure documents.  Of those polled, 52 percent support the moratorium, while 34 percent oppose it.

So who do Americans think is responsible for the foreclosure mess?  The mortgage lenders are to blame, according to 45 percent of poll respondents; 26 percent thought that homebuyers who purchased beyond their means are the guilty party; another 20 percent blames both sides.  Cara Habegger of Akron, OH, summed up the last point of view.  “Certainly they are both at fault.  Most people tend to blame the big institutions and that’s valid but if you’re making poor financial decisions and buying houses you can’t afford, that’s also not excusable,” she said.

The House That Started a Foreclosure Frenzy

Thursday, October 28th, 2010

Meet the hard-luck Maine homeowner whose faulty papers ignited a foreclosure crisis.     A small, weathered, blue-gray house in Denmark, ME, set off a national uproar about the foreclosure crisis when its owner, Nicolle Bradbury, lost her job and stopped paying her mortgage two years ago.  The family, which includes Bradbury’s disabled husband and two children, lives on food stamps and welfare. When the bank started to foreclose on the house, Bradbury contacted Pine Tree Legal Assistance, a non-profit group and was lucky enough to have her file read by retired attorney Thomas A. Cox, who decided to help her as much as possible.

Cox’s act set off a national foreclosure uproar, with the attorneys general of all 50 states opening investigations into the bad paperwork and questionable methods behind many of them.  The Senate plans to hold a hearing and the federal government is taking a closer look.  The housing market – currently fueled by foreclosure sales – is chaotic.  All this occurred because Cox thought something about Bradbury’s foreclosure file didn’t look right.

In reading Bradbury’s filing, Cox noticed that the documents from GMAC Mortgage were approved by an employee whose title was “limited signing officer”, which indicated that the person who approved the foreclosure likely knew little about the case.  When Cox won the right to get a deposition from the employee in question, he learned that the individual had signed off on as many as 400 foreclosures a day, and that no one at GMAC Mortgage had actually reviewed the documents.

“A lot of people say we just want a free ride,” according to Bradbury.  “That’s not it.  I’ve worked since I was 14.  I’m not lazy.  I’m just trying to keep us together.  If we lost the house, my family would have to break up.”  Unfortunately, Bradbury is almost certain to lose her house, despite the errors made in the foreclosure process.  “Had GMAC followed the legal requirements, she would have lost her home a long time ago,” said Geoffrey S. Lewis, another attorney on the case.

To listen to The Alter Group podcast on solving the foreclosure crisis, click here.

Wealthy Chicagoans Return to Purchasing Upscale Houses, Condos

Wednesday, September 29th, 2010

High-end Chicago houses and condo sales are rising.High-end residential sales in Chicago rose – somewhat unexpectedly — during the first eight months of 2010. This is primarily a result of sellers reducing their asking prices and closings at some high-profile condominium developments.  Even with the uptick in sales, there’s still an excess of houses and condos on the market that likely will depress prices even more.

According to an analysis by Midwest Real Estate Data LLC, there were 452 single-family houses and 572 condominiums price at upwards of $1 million on the market as of August 31.  That represents an 18-month supply of houses and 21 months worth of condominiums.  James Kinney, Baird & Warner, Inc.’s vice president of luxury sales, said that a normal market is a six- to eight-month inventory.  “I think we’re in for many months of wading through inventory,” according to Kinney.  “The supply is going to continue to build until we see a turn in the job market.”

High-end single-family home sales rose approximately 24 percent in the first eight months of the year.  That totals 199 sales as opposed to 161 in the same time period of 2009.  Condominiums fared even better with sales rising 85 percent to 253 units, compared with just 137 a year ago.  Kinney said that the uptick can be attributed by the first closings at high-end developments like the Elysian Hotel and Private Residences and Ten East Delaware.

Even Jamie Dimon, CEO of J.P Morgan Chase & Company, has hopped on the bandwagon.  He recently cut the price of his tony Gold Coast mansion to $6.95 million – a 25 percent reduction from the previous $9.5 million.  Janet Owen, a broker at Sudler Sotheby’s International Realty who is the listing agent, said “They realize the market does pertain to their home, not just everyone else’s.  That’s why these properties are selling.”

Caterpillar, Boeing Defy the Odds With Strong Sales

Monday, August 16th, 2010

Some companies are posting 90 percent growth.  One company that is holding its own despite the shaky economy is Peoria, IL-based Caterpillar, Inc., which reported an enviable quarterly profit thanks to growth in emerging markets.  The world’s largest manufacturer of construction and mining equipment is benefiting from growing mining and energy operations with orders outpacing shipments to dealers.  Additionally, Caterpillar plans to increase production during the second half of 2010 and has hired 3,650 new employees this year — 1,250 in the United States and 2,400 overseas.

Caterpillar, which laid off 30,000 employees globally from late 2008 through 2009, is being cautious, saying it still has “significant economic concerns.”  Eli Lustgarten, an economist with Longbow Research, notes that “Construction in developed countries is not doing well, particularly in the United States.”  Caterpillar is well aware that its second-quarter profit of $707 million was derived from sales which rose 116 percent in Latin America and 62 percent in the Asia/Pacific region.

Another company that is prospering is Boeing, which has delivered 191 Next Generation 737s so far this year, including 95 in the second quarter.  Chicago-based Boeing has delivered 222 airplanes in 2010.  Demand for single aisle planes comes not only from growth markets, but also for replacing older aircraft such as the 737 Classics, A320s, and McDonnell Douglas MD-80/90s.  The demand for single-aisle airplanes remained strong even during 2009, according to Boeing.  The growth of low-cost carriers, emerging intra-China demand, and a large need for replacement airplanes will keep the demand for single-aisle airplanes strong into the future.

“The world market is doing much better than last year, but there are still challenges,” said Randy Tinseth, vice president of marketing, Boeing Commercial Airplanes.  “Looking at 2010, we see a world economy that continues to recover.  We expect the world economy to grow above the long-term trend this year.  As a result, both passenger and cargo travel will grow this year.”

Banks Are Hiring as CMBS Restarts

Thursday, July 15th, 2010

Banks are starting to hire again as they return to structuring CMBS, a sign that the financial markets are gradually returning to normal.  “I see lots of friends who used to be employed, and weren’t for a while, and are now being rehired by institutions,” said Jonathan Strain, debt capital markets director at JPMorgan Chase’s CMBS division.Banks rehiring staff to work on new CMBS.

This industry-wide hiring is evidence of the banking sector’s effort to recover from the depths of the Great Recession and rebuild the capability of providing liquidity to refinance commercial real estate owners who need to recapitalize their portfolios.  Industry leaders believe that CMBS may never recover to its 2007 origination peak of $237 billion.  So far this year, CMBS originations total just over $1 billion.  According to one banker, the CMBS market may eke out $10 billion in 2010; that could ultimately grow to a total of $100 billion annually several years down the road.

According to Lisa Pendergast, managing director with Jeffries Group, Inc., “Supply will be far less than what we were accustomed to.”  Pendergast also is president of the CRE Finance Council, the industry’s leading trade group.

Are Banks Really Too Big To Fail?

Wednesday, April 21st, 2010

Former IMF chief economist opines on whether banks are too big to fail and possible solutions.  Simon Johnson, a professor at M.I.T.’s Sloan School of Management and former chief economist at the International Monetary Fund, raises the question of “As we move closer to a Senate – and presumably national – debate on financial reform, the central technical and political question is:  What would prevent any bank or similar institute from being regarded – ultimately by the government – as so big that it would not be allowed to fail?

Writing in the New York Times, Johnson believes that there is sharp disagreement on what would be needed to end “too big to fail” – or, as he terms it, “T.B.T.F.”  From the viewpoint of Senator Christopher Dodd (D-CT), “creating a ‘resolution authority’ would, at a stroke, effectively remove the perception and the reality that some banks are too big to fail.  The basic idea here, as elaborated by Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC) would expand the powers it currently has to ‘resolve’ – i.e., take over and liquidate in an orderly manner – banks with federally insured deposits; it could do this for any financial institution.”

The Republicans, on the other hand, believe that this approach would formalize the existence of T.B.T.F. banks.  They believe that the FDIC lacks the skill to wind down complex financial institutions as this job differs from closing small- and medium-sized banks to protect depositors.  The “counterproposal, which seems to also have the support or Senate Richard Shelby (R-AL), is that we should just allow big financial firms to fail outright, i.e., to run through the usual bankruptcy procedures.  At a rhetorical level, ‘let ’em fail’ has some appeal.  But as a practical matter, it is a complete non-starter,” according to Johnson.

The third suggestion, proposed by Senator Ted Kaufman (D-DE), is quite simple.  “Break up these megabanks.  As even Alan Greenspan said in October 2009,” Johnson says, “‘If they’re too big to fail, they’re too big’.  There is no evidence for economies of scale or scope – or other social benefits – from banks with assets above $100 billion.  Yet our largest banks have balance sheets around $2 trillion.”

Johnson concludes:  “Making our largest banks smaller is not sufficient to ensure financial stability.  There are many other complementary measures that make sense – including higher capital requirements, more transparency for derivatives and generally more effective regulation.  But reducing the size of our largest banks is absolutely necessary if we are to reduce the odds of another major financial catastrophe.”

CMBS Activity Expected to Remain Slow in 2010

Thursday, February 25th, 2010

CMBS transactions might total just $15 billion in 2010Commercial mortgage-backed securities (CMBS) are expected to remain below $15 billion in 2010 as borrowers cope with falling property values.  According to Alan Todd, a JPMorgan analyst, debt sales backed by CBD office, hotel and shopping center loans could be as low as $10 billion this year.  Aaron Bryson of Barclays Capital is more optimistic, predicting transactions totaling approximately $15 billion for the year.

The federal government has promised to revive the $700 billion CMBS market, even as property values fall and securing loans is difficult.  In 2007, a record $237 billion of debt was sold.  That fell precipitously in 2008 to just $12 billion and even further to $1.4 billion in 2009.  Activity isn’t expected to increase until the second half of 2010.

“The banks would like to lend,” Todd noted.  “There are fewer properties to lend against.”  He pointed out that many owners went heavily into debt during the boom and now cannot locate properties not currently encumbered to lend against.  The dearth of new loans cuts off funding to borrowers whose debt is maturing.  Approximately two thirds of loans bundled and sold as securities – totaling $410 billion — may require additional cash as property values fall and underwriting standards get tougher, according to Deutsche Bank AG research.

Moody’s Investor Services reports that commercial real estate prices in the United States are 42.9 percent lower than their 2007 peak.