Egan-Jones Has Had Concerns about JPMorgan Chase "For Quite Some Time"

JPMorgan Chase JPM announced an approximately $2 billion trading loss yesterday, on what the firm described as a hedging strategy.

Egan-Jones Ratings Company, a firm that was the first Nationally Recognized Statistical Rating Organization to downgrade US debt in July 2011, downgraded JPMorgan Chase's debt last month.

William Hassiepen, Vice President and Co-Manager of Egan-Jones' ratings desk, tells Benzinga, “We have actually had concerns over the proprietary positions JP Morgan Chase has taken for quite some time.”

Hassiepen voices concern that JPMorgan Chase's nominal, as opposed to net, credit default swap (CDS) positions are not reflected in its financial statements. He also says measures of CDS positions that are included in JPMorgan Chase's financial statements are, in part, based on internal risk ratings. He speculates that JPMorgan's long CDS positions could be underwritten by international companies that might subject the firm to significant counterparty risk.

In addition, Hassiepen explains that he does not think commercial banking and investment banking activity are compatible. He notes that commercial banking is stagnant or shrinking, so firms like JPMorgan Chase may be placing greater reliance on investment banks to make money. Resultantly, investment banking divisions of companies with both investment and commercial banking may be under pressure to take positions that put commercial bank deposits at risk.

He points out that JPMorgan Chase is different from firms like Morgan Stanley MS and Goldman Sachs GS that are fundamentally investment banks, which he would expect to undertake proprietary positions.

“I think that regulators have a massive challenge,” says Hassiepen. He states that government regulators must decide if they will allow individual companies to operate both investment banks and commercial banks in tandem.

JPMorgan Chase has its annual shareholder meeting scheduled for May 15th.

Disclosure: At the time of this writing, I did not own shares of any companies mentioned in this post.

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