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The JP Morgan Event : We feel vindicated at several Levels

May 14, 2012

Readers of this blog and the book Stories in Credit Analysis would not have been surprised at the wheels coming off from the synthetic credit portfolio at JP Morgan.  Just a few weeks back, in a brief note on Credit Suisse, we had said that published bank quarterly earnings reports are less than useless.  The true earnings, to some extent, can be gleaned by poring closely through the SEC and other regulatory filings of the banks.

1) We have been saying that rating agencies have no clue about the balance sheet and off-balance happenings at the big banks.  True to form, Fitch downgraded JPM only after a credit risk event had been reported elsewhere.  Big bank credit ratings are based more on individual and institutional reputations and not on a ruthless analysis of the earnings power and balance sheet strength of banks.  Because published Tier 1 ratios are also overstated, the agencies which use these numbers for their analysis come out looking second best (See

2) VaR is a useless risk measurement tool.  See

3) A bank is in the business of underwriting loans based on principles of sound credit analysis.  It has no business hedging that risk.  Hedging, in such cases, is invariably code for speculating.  True, some loans will turn sour, no matter how well the loan book is underwritten, but a bank which is underwriting loans on the basis of sound analysis can always absorb such losses.  Again, we had mentioned this in Chapter 4 of Stories in Credit Analysis.

4) Management hubris and management that provoke fights with regulators and government agencies do not work to the advantage of creditors.  See






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