JPMorgan unit has $100 billion in risky bonds

By Sam Jones, Tracy Alloway, and Tom Braithwaite
Financial Times, London
Friday, May 18, 2012

http://www.ft.com/intl/cms/s/0/8ef035de-a043-11e1-88e6-00144feabdc0.html

The unit at the centre of JPMorgan Chase's $2 billion trading loss has built up positions totalling more than $100 billion in asset-backed securities and structured products -- the complex, risky bonds at the centre of the financial crisis in 2008.

These holdings are in addition to those in credit derivatives that led to the losses and have mired the bank in regulatory investigations and criticism.

The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralised loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times.

The bank has said its derivative activities were intended primarily to help balance risks on its overall balance sheet, but the revelation that it has built up other large, risky positions is likely to raise further questions about the CIO's remit.

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The CIO sprang into the spotlight with the revelation of more than $2 billion in losses on the complex derivative trades, a turn of events that has triggered a Department of Justice investigation and angered US lawmakers.

But the CIO has also dominated market activity and built up huge positions in other, equally esoteric markets, according to leading traders.

"I can't see how they could unwind these positions because no one can replace them in terms of size. It's a bit of the same problem they face with the derivatives trade," said a credit trader at a rival bank. "They pretty much are the market."

The unit made a deliberate move out of safer assets such as US Treasuries in 2009 in an effort to increase returns and diversify investments. The CIO's "non-vanilla" portfolio is now over $150 billion in size.

"Two years ago they kind of kicked off" renewed market activity in risky assets," said one banker who sells financial debt. "It was like they provided some kind of 'philanthropic' service to the market to encourage it to get going."

In November 2010, even the British Bankers' Association, a lobbying group, explicitly noted the scale of the CIO's activities in a warning on the fragility of the UK mortgage market.

The JPM CIO "has taken more than £13bn (or 45 per cent) of the total amount of UK RMBS" (residential mortgage backed securities) "that has been placed with investors since the market re-opened in October 2009," the BBA said.

The bank is planning to reduce its exposure to more complex products in the CIO and is likely to invest more of its $360bn in "excess deposits" in safer securities such as US Treasuries, according to people familiar with the matter -- a move that will be fraught with difficulties.

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