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Michael Olenick: WhaleMu – JP Morgan’s Next Surprise?

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By Michael Olenick, creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data

In an admittedly strange twist of timing JP Morgan, the same JP Morgan that just announced a surprise $2 billion loss caused by the “London Whale,” became the first and only of 26 banks disclosing subprime investor data to flip me the digital bird, refusing access to the public loan-level performance data for their Washington Mutual loans. WaMu, one of the most reckless subprime lenders, was swallowed whole by JPM and they’re having serious indigestion.

Nelson D. Schwartz and Jessica Silver-Greenberg of the New York Times verify that the purpose of the Chief Investment Office — the London Whale — is to offset risk caused by the Washington Mutual loans:

Under Mr. Dimon’s leadership, the chief investment office — which was responsible for the outsize credit bet — was retooled to make larger bets with the bank’s money, a former employee said. Bank executives said the chief investment office expanded after JPMorgan Chase’s 2008 acquisition of Washington Mutual, which added riskier securities to the company’s portfolio. The idea behind the strategy was to offset that risk.

It isn’t hard to figure out why JP Morgan doesn’t want anybody looking into and through their garbage. I have not been able to ascertain whether these reports are required under disclosure requirement Regulation AB (the law itself seems to say yes, but the experts I spoke to gave divergent readings). Whether they are or aren’t, JPM’s refusal — when everybody else cooperated speaks for itself.

As those loans sour, and they continue to rot like a dead skunk on a hot July day, the bets needed to offset the losses are increasing. It looks like the bank, peering into that portfolio they refuse to share, is becoming more than a little bit desperate. Like a compulsive gambler after a multi-day bender resulting in crippling losses they decided to double down rather than walk away, leading to their current whale of a surprise and likely a mirror-image follow-up for the WaMu losses this was supposed to offset.

For anybody who believes that JPM’s position is normal .. it isn’t. Twenty-six other banks quickly popped open the doors to their repositories, as they’re required to do. Perennial bad-boy Aurora Loan Services is the only other one that’s ignored my requests, though since it looks like they’ve sold their servicing operations the jury’s out whether their silence is purposeful or whether there’s nobody home on the other side of those requests.

Like I said, I’m not sure whether these disclosures are exempt. There are certainly many marked private, but they seem to be overwhelmingly CDOs and similar more exotic or clearly closely held instruments. I’ve never seen an entire series of MBS from an issuer that is exempt: even a few stray WaMu deals that ended up in other repositories are open to the public.

JP Morgan’s insistence that “[t]he site is maintained for JPMorgan Chase RMBS clients,” only, demanding that I include my JP Morgan Chase contact, may be legal but it is unprecedented. In context of their recent trading losses, the knowledge that those losses were to hedge against the WaMu losses, Dimon’s prior comments downplaying both losses, and strong analysis that the WaMu loans are some of the most impaired MBS it’s fair to conclude that JPM is hiding something in the basin of their loan outhouse.

I’ve spent the past couple months holed away downloading MBS data in bulk to enable investors, analysts, academics, government agencies, or whoever else wants to inspect performance information and project losses for every subprime loan trust. When finished, this week hopefully, I’ll have a veritable ABS MRI machine that can peer into the true health of the housing and housing finance market. It’s harder than it sounds: one of those projects where software engineers emerge from their digital caves after months, bleary eyed and long past due for a haircut but holding game-changing technology.

My database, which includes everything except WaMu loans thanks to Jamie, is finally almost finished. But even in preliminary form it is clear that the AAA-rated senior tranches — the ones that really were never supposed to take losses — are toast that’s burning worse by the day. Servicers, trustees, government officials have been doing anything to delay the inevitable losses but when people don’t pay their mortgages, and housing has declined by over 50% in many of their markets, there’s only so much accounting chicanery they can do: the money just isn’t there.

My suspicious are more grounded than tin-hat delusions we’ve been hearing from the housing is hot again crowd. R&R Consulting, a well-regarded structured valuation expert I work closely with conducted a portfolio-wide analysis of undisclosed (“limbo”) losses on RMBS. In a special in-depth report dated February 2012, long before JPM told me piss-off when asking for access to the more granular WaMu loan-level data, they reported that WAMU had the highest limbo loss level–about $810 million—in just one transaction. Repeat: experienced analysts dug this out even without loan level data. It sounds likely that it won’t be long until Dimon reports another ten-figure surprise that I’m sure he’ll apologetically pawn off on the US taxpayer.

For anybody asking “um — isn’t this over — didn’t all this fall apart back in 2008?” the answer is not really. That mega-meltdown was really a mini tremor caused by the lower and smaller tiers of these securities; last time junior visited to stir things up but this time papa’s walking down the street carrying a mean look and a big stick. That’s because the mezzanine level tranches of most bubble-era MBA are either gone or guaranteed to be gone — finally eaten up by current or pending losses — leaving the lower AAA tranches to take their place as the bearer of losses. This was never supposed to happen. Everybody knew that CDOs created from the lower tranches were risky, even if the ratings agencies said otherwise, but nobody thought the meltdown would last this long that the actual top tranches would be nicked. But the data couldn’t be clearer: those bottom level A-class tranches of yesterday are the new bottom level M-class tranches of yesterday.

All this is surprising because these same MBS tranches have been on fire lately. Hedge funds bought them for very little when nobody wanted them — setting their own price — and now they’re selling them back at steep gains because housing is peachy again, never mind the enormous amount of shadow inventory. Hopefully the buyers of these same securities aren’t being set up, again, because nobody would be stupid enough to fall for that same trick, again. Hopefully.

It is these lower tranches and other derivative products, which are by definition exponentially smaller than the more senior securities like the ones JPM is hiding (well, before the banks multiplied them several times over using credit default swaps) that blew up the world economy in 2008.

I’m guessing that it is the inevitable meltdown of what remains of the AAAs (the amount outstanding has been reduced considerably by refis) that has been at the impetus for the housing cheerleaders. By refusing to move their foreclosures forward, then refusing to take title, then refusing to REO those homes, the trusts don’t have to recognize the losses because, ya’ know, the abandoned and dilapidated properties will magically double in value as long as we hold our breath and wish.

My mountain of data that shows loss severity in excess of 100-percent is not uncommon. When we look at the loans, compare similar loans from those who report them more honestly, multiply the average severity by pending reported and, um, overlooked foreclosures, then it becomes clear that the lowest rated AAA’s are toast. This reaffirms the report by R&R Consulting report that $175 billion of loan level losses had not been allocated to the trusts. Whoops!

Jamie Dimon admitted his $2 billion loss “plays right into the hands of a bunch of pundits out there” on his conference call explaining his stinky. Dimon went on to call the losses “egregious” and “self-inflicted.” In light of the London Whale it is clear that when it comes to sky-high risk, like JPM’s WaMu exposure, the bank has adopted an advanced risk management strategy: telling researchers to piss off then hiding.

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32 comments

  1. F. Beard

    Servicers, trustees, government officials have been doing anything to delay the inevitable losses but when people don’t pay their mortgages, and housing has declined by over 50% in many of their markets, there’s only so much accounting chicanery they can do: the money just isn’t there. Michael Olenick [emphasis added]

    And many are determined that it NEVER be there!

  2. jake chase

    Strip away the smoke and mirrors and you have a housing sector in which huge losses remain to be taken and property values remain exaggerated by 50%. Nothing can resolve this except a bailout extended to the American public on a per capita basis. Since this isn’t going to happen we can expect the Fed to eventually step up and acquire all these toxic RMBS and simply ignore the cascading defaults, which will amount to a selective bailout of those who borrowed recklessly and the banks that financed them, while those who saved prudently will watch their capital continue to waste away under another round of quantitative easing and ZIRP. What remains unclear is whether there will be another meltdown in stocks and commodities.

    Bernanke doesn’t seem to understand that you can’t engineer inflation and wage compression simultaneously.

    1. alex

      “we can expect the Fed to eventually step up and acquire all these toxic RMBS”

      What the heck. They already picked up a few trillion, why not talk real money?

      The irony is that this demonstrates the MMT types are right, at least to a certain extent. In the sense that, under the right circumstances, the Fed can simply create money without causing excessive inflation. When they spend $2T for RMBS or other commercial trash that only has a value of $1T, then they’ve simply printed the other $1T.

      Of course it would be nice if, as you point out, this bailout was a little less selective. Use it as government funds for stimulus, or at least reducing the public debt. Or just give $X to every person in the country, perhaps w/ Keen’s proviso that it first be used to pay any outstanding debt.

      Nah, that’s gross financial irresponsibility. But printing it and handing it to mismanaged, reckless and perhaps criminal banks is the height of financial responsibility.

      1. chitown2020

        They want to buy back more of the crap they created..? I guess if they can’t extort money out of it from homeowners, they can package it up and sell interests in it as fertilizer..They can call it what it is…crap derivatives.

        1. alex

          “sell interests in it as fertilizer”

          I dunno. For all that we make jokes about it, fertilizer is actually useful.

          1. chitown2020

            It would be more honest then what they are doing right now. When the commemtators on the financial channels are saying the banks are becoming too predatory than maybe its time to stop the insanity and admit what they hold is worthless. The robbery of the people has to stop. Their derivatives fraud debt is massive and can never be repaid. They are just stealing and its evil and sickening.

  3. john bougearel

    Michael,

    The real story that you want to tell to the public is that today’s lower level AAA tranches are yesterday’s lower level mezzanine tranches. And that this “was never supposed to happen.”

    That JP hides big ugly stinky, festering things to investors and the public is not ever going to be news.

    Identifying how and when these lower level AAA tranches that are now toast become “recognized” by various banks and trusts would be much more revelatory and materially significant to NC readers. Feel free to expound upon these inevitabilities in future NC contributions.

    Thanks, jb

    1. financial matters

      Yes, this is an interesting question. It seems like the Fed’s ability to keep all these investors whole would be limited. The Fed handing out cash to the banks is similar to the servicing fraud and theft such as with MF Global to provide funds to continue to pay out on various cdo and cds products. The recent 2 billion loss at JPM seems to be an inability to deal primarily with cds in Europe. I think MF Global type raids will be limited and we’re starting to get more light into servicing and foreclosure fraud. Directing the taxpayer Fed money in a better direction would also be helpful. (as per alex above) Raising interest rates would stabilize the system by making conservative investments more attractive…

    2. Michael Olenick

      Yes – that’s the point of the database. It’s almost finished and I will pivot to start writing more what we see within the data. The JPM post became germane separately though because, while finishing the overall database, JPM decided to close WaMu. Combined w/ their London fiasco that was designed to offset the WaMu losses that stands alone.

      I’ll write in more depth as the data becomes a cohesive whole and the analysts I work with decipher it but it’s become clear the lower A-class tranches are effectively the new upper M-class securities. Ratings agencies have marked them impaired but not enough. For example, take a deal that had four A tranches. A-1 and A-2 are paid off; A-3 is barely dented and when pending foreclosures are taken into account there’s nothing left in M-1. That is, A-4 will take the full brunt of losses.

      In a true example, ratings agencies re-rated them (finally) but marked both A-3 and A-4 as, say, BB. But since A-4 may as well be the former M-9 (while paying yields as if it’s still an A-class tranche), whereas A3 will receive the prepayments, the possibility that they’re equal from a credit risk perspective makes no sense. One pays low yields and carries sky-high risk: it stinks. The other also stinks, albeit a lot less because some people will refi out of these and legitimately pay off their mortgage.

      More on those, with specifics, in future pieces.

      1. chitown2020

        They are closing WAMU now after they have stolen how many homes…? Smells like a cover up. No matter…they still stand in the shoes of the Originator. Banks hidiing in bankruptcy or hiding in FDIC receivership claiming to be “failed banks” does not change the fact they don’t have the notes. It is just more deceptive practices. Business as usual.

      2. Mark P.

        As PL says, I’ll be looking forward to seeing your future work in this area. This is important stuff and thanks for it.

  4. chitown2020

    Does the data say anything about paying back the American people the gagillions of dollars they owe US..?

  5. briansays

    the scene in Casablanca comes to mind
    Louie, the good vichy cop
    “I’m shocked to learn there is gambling going on here!”
    Your winnings sir

  6. David Chaney

    Let us not forget Chase was given $39 Billion in WaMu loans when Chase “bought” WaMu for $1.1 million. The bank is actively using every trick in the book to liquidate these loans. I guess the theory is some cash in the hand is better than a paid up loan which will be paid off in the future.

    I have a Chase loan, which is a termed out WaMu loan which Chase if foreclosing on this week. I paid the note on time for two years, and was current (made 2 additional payments (post expiration.)

    The loan was $900,000 and the building was cash flowing. It goes to auction Wednesday with a starting bid at $323,000. A foreclosure just sold next door, a foreclosure across the street.

    I BEGGED Chase to extend the loan. Icomplained to the OCC. Immediately upon OCC intervention Chase filed foreclosure proceedings, since the OCC bows out as soonb as a legal actionn is filed.

    I had gone through a Chapter 11 reorg, but Chase’s loan was not crammed down. In fact, I rolled in $120,000 in the rents they lost when they installed a receiver to steal the rents, and their legal fees they used against me.

    When the got the receiver installed, the Chase lawyer yelled at the judge, “He’s paying for two lawyers. H

  7. Curious Georgina

    Dimon was a leading employee or cohort of the Obama administration. What of Goldman? No National Enquirer treatment for their ilk?

  8. David Chaney

    Let us not forget that Chase got those $39 billion in loans in exchange for the $1.1 Billion they “paid” the FDIC for the bank, its branches, etc. In other words, “FREE.”

    I have a Chase commercial term loan. Paid on time for two years. The loan expired. Chase is foreclosing on the $900,000 loan, has it set for auction on Wednesday for $323,000. The 4 plex next door is in foreclosure. The huge building across the street was sold out of Chapter 11.

    I was able to pay the note, the building was cash-flowing and while I had gone through Chapter 11 and two of my properties were crammed down, Chase’s loan wasn’t. In fact I rolled $120,000 in their legal fees and the rents they lost when they put a receiver in place to steal the rents from both the bank and me into the loan.

    This action follows two years of the two crammed down banks refusing my court-confirmed payments, and trying to foreclose three times, and reporting me as late to the credit bureaus, thus ensuring I couldn’t refi.

    So fare I’ve paid more than $50,000 in legal fees to enforce the Chapter 11 Plan.

    THe final indignity came after I reopened my bankruptcy case to get an injunction to stop Deutsche Bank in their third attempt to sell my property after two years of on-time (but oft-returned) payments.

    I also paid off all my unsecured creditors a year early in an attempt to close my BK, and then reopen a new one to get a stay to stop Chase.

    Got a new bank-loving BK judge who refused to discharge my bk, and refused to give me a stay. Further, she ordered me back to the negoitiating table with Deutsche. Strangely, out of 50 creditors, Deutsche was the only creditor to oppose my discharge.

    Further evidence that following the law in this country will get you absolutely nothing – and the banks are always blameless and above reproach. The judge had spent the last 11 years investigating fraud for the U.S. Trustee’s office, and as we all know, the only people who commit fraud in this country (other than, strangely, in Louisiana, in the cases before Judge Elizabeth Magner) are debtors.

    And thus judge is finally in place to punish debtors. And in my conversations with other BK lawyers and heard tales of her outrageous conduct toward debtors, it is clear she is going full throttle to punish debtors,
    notwithstanding Chapter 11 is supposed to keep viable businesses alive.

    It is truly frightening, and for me just literally nauseating. And the sheeple head to the slaugher.

  9. Sally Webber

    10 percent of people who work on Wall Street are “clinical psychopaths,” exhibiting a lack of interest in and empathy for others and an “unparalleled capacity for lying, fabrication, and manipulation.”

    1. Flying Kiwi

      And the 90% that are not clinical psychopaths are forced to adopt psychopathic attitudes and behavior simply to keep their desks from being swallowed by the other 10%.

  10. chitown2020

    Will we ever learn that fraud makes no sense at all? U.S. courts have ruled that when fraud enters a contract, fraud vitiates everything. It starts with taxation and fake money lending…..That is where the hijacking began and is where the original robbery occurred. It is also called other things like QE, FED MONETARY POLICY, The communist bank of China opening branches in the US, the FED collecting mortgage payments they should have never been allowed to purchase because they are INSOLVENT DEBTS because they commited $700 trillion dollars in mortgage fraud with our signatures, banks who dont have the notes using MERS and third party debt collectors to repackage and recycle fraud in order to STEAL PROPERTY, overseas banks repackaging worthless paper they were dumped and repackaging it as something of value selling interests in the junk back to us in overseas branches. The FED is using fraud recycling to rob US.

  11. Blurtman

    Since we are to believe that some or many or most of the RMBS do not actually have mortgages assigned to them, where is the money coming from to pay the RMBS investors? Are the mortgages in some sort of financial Lazy Susan? Is the money coming from raiding other companies like MF Global? Free money invested in UST’s can only go so far, no?

  12. Doug Terpstra

    Excellent report, Michael. Thank you. It’s good to remember that banksters like Dimon lie and cover-up for an obscene living. It’s almost guaranteed that JPM’s admitted losses are only a fraction of reality.

    This article helps explain the very strange housing “recovery” contrary (for now) to some of your prior posts that housing is nowhere near the bottom. In phoenix, inventory is at historic lows, about 1/3 normal market, 1/8 2010 market, and sales are over 50% investor cash deals—probably new hedge fund REITs or REMICs. Yet independent reports insist that there’s very little shadow inventory here, and bidding wars for the few properties available are back to 2005 levels, with dozens of offers over list.

    From what I’ve read, Fannie and Freddie, and maybe the Criminal Reserve, are reselling REOs at auction discount to the same vulture capitalists that unloaded them on taxpayers at retail, with the proviso that they hold them as rentals for at least 5 years. Thus these never show in shadow inventory. So in Phoenix, there’s a new rent price bubble in which investors are hoping to cash in by collecting inflated rent from those with compromised credit. Siphoning blood from turnips may appear to pencil out for a while, but it seems to be a paraphrase of Mme Antoinette’s solution, “let them pay rent”.

    Your take on housing reminds me of JM Keynes reminder that “Markets can remain irrational longer than you can remain solvent”. What’s scary is your assertion that the 2008 meltdown was a mini-event compared to what’s coming. Not a good time to invest in houses or stocks I guess.

  13. GeorgeK

    We’ve all seen the recording of old smokestacks being imploded; first the base disintegrates, then the middle falls but the top of the smokestack appears to hang in suspension for a few moments before it succumbs to gravity. In the end gravity always wins.

    1. Crazy Horse

      My God, I thought for a moment you were describing the World Trade Center towers. But everybody knows that the laws of physics and gravity were suspended on that day. Easy when you live in a nation that believes in faith ahead of science.

  14. sarastro

    Robert Reich drops a bombshell today:

    “Move on? Word on the Street is that J.P. Morgan’s exposure is so large that it can’t dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street.”

    robertreich.org

    1. chitown2020

      The commentators on the financial channels are now saying the banks are becoming too predatory. They always were but, this is getting ridiculous. Its so blatantly bad its like the want to be stopped.

  15. Blurtman

    Let’s face it. Obama is a junior Senator in over his head, whose compelling oratory has fooled most folks, once again. This latest JPM debacle is causing questions as to why the NY Fed did not regulate the firm better. But Obama’s pick, Tim Geithner, said that the he did not view the NY Fed as a regulator when he was there. And that moron Geithner hired ex-Goldmanite Dudley, who is doing a “great job, Brownie.”

    Pathetic. Obama has got to go. Please write-in William K. Black for President.

    1. chitown2020

      Over his head or working for the Globalists…the NWO…? I think its the latter. CNN reported Obama came in to power under the same economic conditions as Hitler. He was put there to install a dictatorship. A Newsmax poll said McCain/Palin won in 2008 by a landslide. The MSM media can spin it an election any way the want. People are not active enough in their communities. They believe what the media tells them. I am not saying McCain is not corrupt..both parties are but, Obama was their man. The electoral college needs to go. Its a dictatorship.

  16. teva mush sandals

    I don’t even understand how I stopped up here, however I thought this put up used to be good. I don’t know who you are however certainly you are going to a well-known blogger when you aren’t already. Cheers!

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