Posted on 07/28/2002 2:45:45 PM PDT by arete
Richard W.
Comments and opinions welcome
Probably more than you wanted to know about JPM, right bert.
Richard W.
Obviously this guy has a short position. The question is- Is JPMs derivatives position large or unusual compared to other institutions of its size and are its positions vulnerable to certain prices level either in gold, interest rates, stocks or currencies?
This report did not seriously address this question other than to say they have alot of derivatives.
I thought that the article answered that.
Richard W.
Chase is one of the banks I use. When I went to their bank Friday they had 5 people greeting folks at the door. This has never happened in 10 years. If they don't have problems they sure seemed concerned.
I hope these banks are OK. But I expect my bankers to be stern, conservative and careful. So, I moved anything that I could that was short term and uninsured out. So were other people. I could hear them doing it.
>I thought that the article answered that.
No. I'm used to committing funds based on a more detailed analysis. This is an ad. Note that the ad comes out after JMP is already down alot and is now useless as investment advice one might act on.
It compared JPM to ALL other banks not to other banks like JMP which use derivatives. Some banks don't use them that much.
With interest rate derivatives (swaps), a series of fixed interest rate cashflows are exchanged with a counterparty for a series of cashflows that float based upon where interest rates are set in the market.
JPMorgan is a leader in this area because while the industry was growing, they had a AAA credit rating making it cheaper to do business with them, and they had (and continue to have) the best risk management team in the world.
Their derivatives position is large for a bank their size, but not the largest in the world. And this derivatives position would be unaffected by a drop in the price of their stock.
Some firms, Long term capital in particular, have used the leverage available through derivatives to over extend themselves in the market. JPMorgan does not do this. Quite the contrary. The trading mantra at JPMorgan is that all derivative trades should be delta neutral, gamma neutral, and rho positive. This means that not only should they not be effected by changes in the market, or changes in their hedge position, but should be structured so that an increase in interest rates will yield a profit to offset their additional cost of doing business. (In nearly every case, this means that a rise in interest rates brings a profit, but a drop in interest rates means that things stay the same.)They do this because like all banks, much of their open market position is credit funded.
The motive of this obvious attempt at a hatchet job escapes me, but I wouldn’t be too concerned about it.
As for myself, I haven't worked there in some time but I still have a friend or two there, some of whom have found their way to high places. Without fail they are all among the most fanatically honest and respectable people in the industry. Since their ability to make a living depends upon their reputation, they have to be. I have personally seen JPMorgan staffers refuse business because they did not think the trade was in the best interests of the customer. You don't get any more respectable than that.
I'm at a buy side firm now, and I won't hesitate even a minute, to continue to do business with them.
http://www.grantspub.com/
Not quite, it'll take 3.
Shares of stock, bonds, and physical commodities are assets, sometimes highly dubious ones I grant you, but they are characterized by having at least some market value in and of themselves. Derivative instruments, whether options, futures, swaps, swaptions, or whatever other kind, are so called because they do not have inherent value themselves, but rather derive their value from the underlying asset or market condition. Swaps and related instruments do not have an underlying asset as such; these items are essentially arbitrage instruments concerned not with the price of something, but rather with the price differential between two somethings.
Best I can do in three sentences, hope it's of some use to you, and FRegards!
As a basic example, JPMorgan agrees to provide a floating interest rate cashflow 4 times a year, for the next 10 years to a client bank of theirs. The amount of the payment will be calculated based on the fixing of the inter-bank offer rate, on the last day of the quarter, and will be in the notional amount of 10 million dollars. (this is a really small example, I'm just trying to make a point)
What they will then do is get two other people interested in the opposing side of the trade to make a deal for 5 million each. This is actually much easier than it would seem when you dominate a market like JP does. So every quarter they pay out on 10 million, and collect on 10 million, and in the meantime, they have made a fee for transacting the business.
But don't mistake the fact that they have managed risk, for them being risk neutral. They aren't totally risk neutral, but they do not have their risks connected in any way with the price of their stock.
In point of fact, it's significantly more complicated than that, but they have the best risk management team in the business, and have policies in place to see to it that things don't get out of control.
As another example, during my tenure there, the entire mortgage bond trading area was fired. Not because they were losing money, (they were, but not so much), but because it was the determination of the bank that since mortgage pre-payment cannot effectively be predicted, they could not effectively manage their risk. So that was that. 50 people were shown to the door, because risk management is top priority at JPMorgan.
The larger and more complicated a derivatives position is, the more complex the risk management, but they are not trying to make money on leverage, they are trying to make money on fees.
Does that help at all?
BTW, if you'd like more information on their risk management methodology, take a look at their website under "risk-metrics".
When I worked in making diamonds our giant press was wound with piano wire, one strand breaks and the others hardly notice, each strand had little pride.
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