Saturday, January 22, 2011

With Love, Jamie Dimon - Reserves Revealed

A faux letter from Jamie to Jay.

To my only Jay,

Thank you for suing us. Without that action, all would be revealed and so much would be lost.

Pleased to tell you more.

We realized over a year ago that we were going to pay you for all that crap that Bear Stearn's, Washington Mutual and our legacy underwriters crammed into the securities that you guaranteed. And as an honest banker I resolved to reserve for it. You, my knight in shinning armor, gave me the opportunity to funnel these reserves into a litigation reserve rather than an outright and obvious repurchase reserve. It was so sweet of you, Jay!

This allowed me and my peers (Brian asked to be remembered to you) to begin building reserves to your exposure without revealing how much we have reserved. I had over $5B stowed away for you boys even before our little deal! (The little deal: Link.) As we did create an account expressly labeled "repurchase reserves" for the GSE exposure, quietly segregating the non-GSE exposure helped downplay the rewards to those who seek and might seek retribution against us.

We've all done it! Brian just fessed up to it today. So again, thank you for suing us. It has been a great excuse to hide this stuff, even though the temptation to show our swollen reserves in time overcame us. The SEC and public questioning increased that temptation markedly. As for our recent settlements now that they are done, let me tell you more.

They say I have betrayed them by settling with you, Jay. But consider this: if the passage of time will reveal the insolvency of MBIA Corp, why on Earth are they pressing for expedited consideration from the NY Court of Appeals? The roles are inapposite to their allegations, as your team drags things out and they push it through. Here's why: the fraud case won't stand a chance if actual subrogation recoveries exceed the paltry $2B you have booked and loss developments peter out. Perhaps its the boys at Sullivan & Cromwell trying to earn fees before the gig is up. Or perhaps the banks would like a better hand at the negotiating table. Regardless, the uncertainty of the future becomes the certain present all too quickly, making discounts disappear. An Edgeworth box can shrink around one's neck like a Chinese finger trap in these situations. So, JP Morgan followed RBC and the little maple leaf squads, taking the first movers haircut now rather than the close shave of the law later.  You know the rest of the salient points, as they have been told here before.

All the banking conference calls will have questions and comments on litigation reserves from here on out. Some will continue to mask the quantity. Brian will continue with the ostrich approach before throwing out another kitchen sink. We have done a good job, and will let further expense trickle through as need be. In this situation, we've been one step ahead. It's been a pleasure benefiting you benefiting us.

Thanking you,


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