Tuesday, January 11, 2011

MBIA/JP Morgan Commutation II - Shhh!

There has been a large commutation. The evidence suggests it was good for MBIA. (see The Eureka Moment: http://tapleysbluedragon.blogspot.com/2011/01/commutation-settlements-jay-told-us.html).

Unfortunately, there may not be much to learn from JP Morgan's Q4 earnings call this Friday. JP Morgan has done a good job of building above average reserves while shrouding the litigation under a fog of war. A Jamie Dimon quote on the company's Q3 call typifies the company's enigmatic strategy:

"I think the way you should look at this topic is that we're bearing today $7 billion of charge-offs, foreclosure, repurchase costs - this affects reserves. That $7 billion will go up or down based upon the economy and stuff like this. I'm not sure stuff like this is going to dramatically change that number. It may extend it a little bit longer and stuff like that but - and remember we have in total, between repurchase reserves and the $11 billion, we have $14 billion of reserves for repurchases or loan losses. And look, the mortgage thing is - we're halfway through all this."

Analyst's interpreted this as everything from $7B with $1B left to expense to $14B with potentially the same amount left to expense. But what can we really learn from this? There are $7B of loan loss reserves. Elsewhere, we see there are $3.3B of repurchase reserves. What's left is litigation reserves, though JP Morgan doesn't expressly say so. But lo, a footnote on page 31 of their Q3 fnc'l supplement notes that they have $4.3B of non-compensation litigation expenses YTD. Dimon indicated that none of this was in regards to "foreclosure-gate." Either this is the greatest coincidence since the cookies disappeared and your 1st grader had chocolate all over her face or 14-7-3= JP Morgan knows its ponying up.

This is no coincidence. This cryptic quote by Mr. Dimon is the hint we needed to know that most of that $4.3B is related to repurchase and related litigation. But it hasn't actually been disclosed to us and probably won't be - even in this opaque fashion - again. Having an undisclosed reserve means an undisclosed settlement. In the case of a settlement that is good for the guy across the table, undisclosed terms help prevent a rush to the courthouse (as contemplated here: http://tapleysbluedragon.blogspot.com/2011/01/latest-settlement-until-next-one.html).

What this all means for investors and observers: don't get down on MBIA and the bond insurers this Friday if Dimon is popping Champagne on great earnings. A large realized gain at MBIA is not precluded by a solid JP Morgan quarter. As I've argued before, the finances make sense on both sides but the opportunity for investors is greater with the guarantors.

Here's one more reason this deal made eminent sense: JP Morgan just took out the star running back of the repurchase/CDO fraud rush to the courthouse. We'll see if it took a defensive end or a safety to do it, but its safe to say it took more than the ball boy. My guess is that it was the linebacker. So - and this is interesting from a JP Morgan point of view - how will the rest of the guarantor team move the ball down field? Mr. Frederico described himself as a glutton for punishment on Assured's Q4 call, but don't expect him to lead his parched competitors to water. He is busy in the tub.

Ambac, Syncora, FGIC are going to have to muster up the resolve and cash to see their cases through. They won't get any inspiration this week.

No comments:

Post a Comment