Bair: Fed Should Tighten Volcker Rule To Avoid Whale-Like Mischief

By Kristina Peterson and Alan Zibel

Notable critics of big banks, including Sheila Bair and Thomas Hoenig could have some new ammunition due to the $2 billion trading loss announced by J.P. Morgan Chase & Co. Thursday night.

In an interview Friday, Bair said the Federal Reserve should consider whether it needs to more narrowly define what kind of hedging will be allowed under the so-called Volcker rule, which restricts banks’ trading activites.

“There is a risk that a loosely defined hedging exception can open the door to a lot of mischief,” she said. “The Fed should look at tightening the definition of hedging as a result of this situation.”

Regulators have yet to finalize the regulation spelling out exactly what is and isn’t permitted under the Volcker rule, which seeks to limit risky trading by commercial banks that enjoy government backing.

Two Democratic senators said Friday that the language of the Dodd-Frank overhaul of the financial system was intended to allow only hedges that were designed to reduce risks tied to specific assets or positions held by a company, not broader bets, as in the case of J.P. Morgan.

However, a draft regulation put out in October by the Fed, the Securities and Exchange Commission and other regulators did permit so-called portfolio hedging, though it added an extra layer of compliance above what banks must do for other types of hedging.

Facebook Roadshow Lands Close to Home

By John Letzing

PALO ALTO, Calif. – Facebook Chief Executive Mark Zuckerberg showed up at the social network’s latest roadshow stop here, kicking off a presentation to investors by laying out the company’s goals, including the need to make further progress in the mobile-device advertising market.

The conclave at a Palo Alto hotel was the latest stop by Facebook executives, who have crossed the country this week to pitch the company’s stock in a blockbuster initial public offering slated for next week. The meeting here took place a short drive from Facebook’s original headquarters, opened shortly after the company was founded by Mr. Zuckerberg in a Harvard dorm in 2004. Facebook is now headquartered in Menlo Park, next door to Palo Alto.

Several investors have already placed orders for Facebook shares, many in the mid to high end of Facebook’s $28 to $35 price range, said people familiar with the matter. Facebook’s underwriters have discussed raising the price range, although people familiar with the matter cautioned that the discussions were not yet serious and no decisions had been made.

Dealpolitik: Coty’s Friendly Overture to Avon Anything But

One thing for sure about Coty’s next play in its fight to buy Avon: It is winning the spin war. Some news reports are saying the letter released by Avon on Thursday proposing a buyout at $24.75 per share is a “friendly” approach.

Nothing could be further from the truth. This is as hard nose a “bear hug”—a letter proposing a buyout which is crafted to put maximum pressure on the target—as they come.

Just because it does not threaten a hostile tender offer does not make it friendly. There is not a friendly word in that letter. Here is how Coty is putting the wood to Avon:

First Coty says its “intention is to submit this letter and our revised proposal to Avon’s Board on a confidential basis.” Sounds friendly enough. Then it says it will pull the offer and say why publicly if Avon doesn’t respond by Monday. So Avon either says yes to pursuing the $24.75 price on Monday (and it is likely Avon would feel compelled to disclose such a development) or it says no and Coty spills its guts. Nice guys.

Regulating the Whale

By Jamila Trindle

Advocates of financial reform are quick to say that the massive losses at J.P. Morgan from a derivatives trader nicknamed the “London Whale” prove Washington needs to rein in Wall Street and regulators need to continue slogging through implementation of the Dodd-Frank law. But with many central planks of the new regulatory system still unfinished, it’s hard to tell if the law would have kept the Whale from washing up on the beach.

1) Would the Volcker Rule, which bans proprietary trading, have stopped the Whale?
Maybe. The Volcker Rule seeks to limit risks that banks take, but it’s unclear where the Fed will draw the line. Could JP Morgan have argued that this trade was a hedge and therefore exempt from Volcker? Probably. Would regulators have bought that argument? Unclear.

2) Would transparency and open trading of derivatives have prevented such a major loss from piling up?
Perhaps. We don’t know whether the trader’s CDS-index trades were collateralized or cleared, two major goals of Dodd-Frank. If they weren’t, a clearinghouse might have made the bad bets more apparent to the bank before the losses ticked into the billions. A clearinghouse looks at the value of a trade and collects margin on the deal, so when a trade starts to go bad, the bank has to post more collateral and could decide to exit the trade sooner.

China Goes Shopping for Shale in U.S., Canada

China’s made news the last couple years pumping big money into North America’s resurgent oil and gas business. And the man with the credit card says the country’s state-owned oil companies aren’t done shopping.

Deal Journal colleague Wayne Ma reports that China Petroleum and Chemical, better known as Sinopec, is in talks with U.S. and Canadian companies to buy more unconventional oil and gas assets.

Sinopec is diversifying from its traditional refining role under the leadership of Chairman Fu Chengyu. Mr. Fu pioneered China’s push into North America’s oil patch, negotiating a pair of joint ventures with U.S. natural gas giant Chesapeake Energy in 2010 when he was still the head of another Chinese state enterprise, Cnooc. Those deals, which were worth nearly $2.5 billion combined and gave Cnooc a minority interest in shale fields in Texas, Wyoming and Colorado.

Under Mr. Fu, Sinopec in January struck a similar deal with Chesapeake’s cross-town rival Devon Energy that gave it a stake in oil fields in Ohio, Michigan and several other states in exchange for $2.5 billion.

Both Devon and Chesapeake are marketing similar deals, though Cheaspeake’s divestiture plans maybe changing. And there’s a multitude of smaller exploration and production companies, including Penn Virginia.and Ultra Petroleum, looking for investors to help them develop shale fields as slumping natural gas prices and the high costs of shale drilling pressure balance sheets.

Ratings Firm Pile On: Fitch Cuts JPM Rating; S&P Lowers Opinion

J.P. Morgan has now been downgraded by Fitch Ratings, which says the move comes after last night’s disclosure of a $2 billion trading loss at the nation’s biggest bank by assets.

Though Fitch calls the loss “manageable” the ratings agency says: “The magnitude of the loss and ongoing nature of these positions implies a lack of liquidity. It also raises questions regarding JPM’s risk appetite, risk management framework, practices and oversight; all key credit factors. Fitch believes the potential reputational risk and risk governance issues raised at JPM are no longer consistent with an ‘AA-’ rating.”

Fitch lowered J.P. Morgan’s rating to A+ from AA-, though it says that rating continues to reflect J.P. Morgan’s “dominant domestic franchise.”

Everybody’s Talking About JPM and the London Whale

Last night J.P. Morgan sent some waves in the form of one large splashing whale.

The revelation of a big $2 billion trading loss in just six weeks raised questions about management practices, raised red flags in Washington and sent shares reeling. The stock is down nearly 10% in recent action Friday.

And across the WSJ and social media world, the commentators, both serious and jocular, turned out in schools. Here’s a recap, via Storify, of the chatter around The London Whale.

JPM to Employees: ‘We Must Remain Vigilant’

FINS.com’s Julie Steinberg files this dispatch on Jamie Dimon’s efforts to reassure employees:

J.P. Morgan’s top brass is trying to reassure employees the firm isn’t going down the same unfortunate path other risk-loving banks have followed after disclosing a $2 billion trading loss generated by the bank’s Chief Investment Office.

Internal memos obtained by FINS from Chief Executive Jamie Dimon — previously thought to be immune from such calamities — and Chief Risk Officer John Hogan seek to assure employees that the bank will fix whatever went wrong. It is typical for leaders of large organizations to issue widely distributed responses to employees following the disclosure of big bad news.

Warren Buffett and the Dimon Principle

Warren Buffett may have some mixed feelings about this London Whale today.

The famed investor recently revealed he had made a personal investment in J.P. Morgan, though it is unclear how much Buffett put in or at what price. Buffett also offered several kind words for Jamie Dimon as a CEO and manager, particularly in reference to his use of J.P. Morgan cash.

But today anyone holding J.P. Morgan is a bit poorer on paper than they were yesterday at this time. And the egg on Dimon’s face may have splattered a tad on Buffett’s sleeve.

J.P. Morgan shares are down 8% to $37.48 Friday, the stock’s worst day since Aug. 8. J.P. Morgan shares fell 9.4% that day, which happened to be the first trading day after S&P downgraded the U.S. and the Dow fell 635 points.

J.P. Morgan, Volcker, ATMs And More

By Neal Lipschutz

It was late 2009, at a conference on finance outside of London, and the estimable Paul Volcker was letting the bankers have it.

The only financial innovation of the prior quarter century that appealed to him, said the former Federal Reserve chairman broadly credited with taming high and intransigent U.S. inflation, was the automated teller machine.

He maintained in late 2009 that no one had shown him a connection between all the financial product inventions that helped take the global system to the brink and substantive economic benefit.

I was reminded of Volcker’s conference comments, which I also wrote about at the time, late Thursday when the news broke about J.P. Morgan Chase & Co.’s $2 billion trading loss in derivatives. J.P. Morgan Chief Executive Jamie Dimon called the strategy that led to the loss “flawed, complex, poorly reviewed, poorly executed and poorly monitored.”