Economic Calendar

Wednesday, June 13, 2012

Indonesian Tin Output Seen Falling as Global Demand Wanes

By Yoga Rusmana - Jun 13, 2012 9:02 AM GMT+0700

Refined-tin output from Indonesia, the world’s largest exporter, may drop this year as the European debt crisis slows economic growth and hurts demand, according to the head of an industry group.

“If prices stay at the current level, production will most likely decline,” Hidayat Arsani, president of the Indonesian Tin Mining Association, said in an interview yesterday in Pangkalpinang, capital of Bangka Belitung, the country’s biggest producing region. Output was about 90,000 metric tons last year.

June 13 (Bloomberg) -- Pranay Gupta, chief investment officer for Asia at Lombard Odier, talks about the outlook for global financial markets and economies. Gupta also discusses Felda Global Ventures Holdings Bhd.'s initial public offering. He speaks in Hong Kong with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)

Tin has lost 24 percent from a six-month high in February as Europe’s crisis and slower growth in China reduced sales of the metal used in soldering and packaging. Prices below $20,000 a ton have some adverse impact on small-scale production in Indonesia, which is entering the peak season for output and exports, according to ITRI Ltd. Research Manager Peter Kettle.

“The big question at the moment is whether lower tin prices will result in a fall in small-scale mine production,” Kettle said by e-mail. “Most of them should still be covering cash costs at current prices.”

Three-months tin ended at $19,700 a ton on the London Metal Exchange yesterday. While that’s 2.6 percent higher this year, the metal declined in the four months through to May in the worst run since the global recession in 2008. The price peaked this year at $25,880 a ton on Feb. 8.

Indonesia represents about 40 percent of global exports, according to St. Albans, England-based ITRI, an industry group. Bangka Belitung accounts for about 90 percent of output and shipments. Exports in the first five months fell 4 percent to 37,668 tons, according to data from the Trade Ministry.

‘Clear Surplus’

While slower Chinese demand had helped push the global market into a “clear surplus” at present, a shortage may reemerge in the second half as growth reaccelerates, according to Barclays Plc. Tin may gain to $30,000 by the year-end, with a full-year deficit of 5,000 tons, according to a May 14 report.

Producers in Bangka Belitung agreed to suspend spot shipments in the final quarter of last year to try boost prices to $25,000. The voluntary curb, which didn’t cover contractual sales, was dropped Dec. 31. Prices fell in the quarter.

The Indonesian Tin Mining Association, also known by its Indonesian initials of ATTI, replaced the Indonesian Tin Association, which was dissolved as it didn’t get support from the Bangka Belitung administration. Arsani, previously president of the old group, was installed yesterday as the head of ATTI by Bangka Belitung Governor Eko Maulana Ali.

To contact the reporter on this story: Yoga Rusmana in Jakarta at

To contact the editor responsible for this story: James Poole at


Secretariat’s Winning Time in 1973 Preakness to Be Reviewed

By Erik Matuszewski - Jun 13, 2012 12:15 AM GMT+0700

Secretariat’s winning time in the 1973 Preakness Stakes will be reviewed using modern video technology to determine if the horse set a record in all three races as he swept the Triple Crown.

The Maryland Racing Commission said it will consider a request by Secretariat’s owner, Penny Chenery, and Maryland Jockey Club President Thomas Chuckas to investigate the official timing of the race. The commission holds its next meeting on June 19 at Laurel Park.

Jockey Ron Turcotte sits atop of Secretariat, right, racing in the lead at the Preakness Stakes, May 19, 1973 at Pimlico Race Track in Baltimore, Maryland. Photograph: Focus On Sport/Getty Images

“During the last 40 years, video technology has been accepted in other professional sports as a supportive mechanism for officials to ensure fairness and accuracy in their decisions,” Chuckas said in a statement. “It is important for horse racing and the record books to confirm the correct time in this historical race.”

Secretariat is one of 11 thoroughbreds to win horse racing’s Triple Crown, with victories in the Kentucky Derby, Preakness and Belmont Stakes in 1973. The Preakness is the only one of the races in which Secretariat didn’t set a record.

The electronic timer used at Baltimore’s Pimlico Race Course recorded Secretariat’s win in 1 minute, 55 seconds, while two independent clockers from the Daily Racing Form each hand- timed the race at 1:53 2/5. The official time was later changed to 1:54 2/5 -- the time reported by Pimlico’s official hand clocker -- because of “extenuating circumstances” with the electronic timer’s recording, the commission said.

Time Discrepancies

The Daily Racing Form still recognizes Secretariat’s time for the 1 3/16-mile distance as 1:53 2/5, which would have broken Canonero II’s then-record of 1:54 set at the 1971 Preakness. The Preakness’s current official record time of 1:53 2/5 was later set by Tank’s Prospect in 1985 and matched by Louis Quatorze in 1997 and Curlin in 2007.

“For me, revisiting this dispute on a new day is a matter of resolution -- for historians, for sportswriters and for racing fans,” Chenery said. “Their voices are supported by sound evidence, and they deserve to be heard.”

Secretariat won the Kentucky Derby in 1:59.4, setting a track record for the 1 1/4-mile distance at Churchill Downs in Louisville, Kentucky, and is one of only two horses to run the race in less than two minutes. He won the 1 1/2-mile Belmont Stakes at Belmont Park in Elmont, New York, by 31 lengths in 2:24, both records that still stand.

Horse racing hasn’t had a Triple Crown winner since 1978, when Affirmed won all three races. I’ll Have Another won the Kentucky Derby and Preakness this year before being pulled out of the Belmont the day before the June 9 race because of tendinitis in his left front leg.

To contact the reporter on this story: Erik Matuszewski in New York at

To contact the editor responsible for this story: Michael Sillup at


Gorman Says Three-Level Cut Would Be ‘Somewhat Stunning’

By Michael J. Moore - Jun 13, 2012 3:58 AM GMT+0700

Morgan Stanley (MS) Chief Executive Officer James Gorman said a three-level credit-rating downgrade by Moody’s Investors Service would be “somewhat stunning” given the firm’s increased capital.

Moody’s has said it may reduce the rating on New York-based Morgan Stanley by as much as three levels when it announces the results of an industrywide review this month. Morgan Stanley can manage through any potential cut, Gorman said today at an investor conference in New York.

James Gorman, chairman and chief executive officer of Morgan Stanley. Photographer: Peter Foley/Bloomberg

“If Moody’s goes to the full extent of their initial guidance, we would find, given the numbers I just shared with you, that a somewhat stunning outcome, given the reality of how different the institution is from what it was,” Gorman, 53, said. “But we’ve prepared for all outcomes.”

Gorman highlighted the increase in the firm’s capital and liquidity since the financial crisis in his presentation to investors. The bank’s liquidity reserve is 23 percent of total assets, up from 11 percent at the end of 2007, while its shareholder equity has doubled, he said.

The maximum downgrade, which would be the largest among U.S. banks and place the firm’s rating two levels above junk, might increase borrowing costs and force Morgan Stanley to post more collateral on trades. It would also threaten a fixed-income trading turnaround as some counterparties would no longer be able to do derivatives deals with the firm.

Moody’s Review

“We’re not panicked over this, but we’re prepared for it,” Gorman said. “We’ll make whatever business adjustments, if necessary, once we get there.”

Moody’s announced the review in February and originally slated the ratings actions for the largest banks for the middle of May. The ratings firm later delayed the action, saying it would make cuts by the end of June.

Morgan Stanley has fallen 27 percent since the review was announced on Feb. 15. The shares climbed 56 cents, or 4.2 percent, to close at $13.93 in New York.

“It’s been a long process to be hanging out there in the wind waiting for this,” Gorman said.

Gorman said all of the firm’s retail brokers will be on the same technology system by July 9 as the integration of Morgan Stanley Smith Barney is completed. The unit will eventually be called Morgan Stanley Wealth Management, he said.

Cost Cuts

The unit’s pretax margin, which was 11 percent in the first quarter, will climb “absent extraordinary circumstances,” Gorman said. Cost cuts will drive a larger part of the increase than revenue-boosting initiatives as the bank seeks a “mid- teens” margin by the middle of next year without help from rising markets, according to a presentation accompanying Gorman’s remarks. Jim Wiggins, a spokesman for the bank, declined to provide a more specific margin target.

The entire firm is on pace to reduce its non-compensation expenses by $500 million this year, as it works toward its target of a $1.4 billion reduction, Gorman said.

Morgan Stanley expects to increase the dividend and stock- buyback program “over time” as markets “settle down,” he said.

To contact the reporter on this story: Michael J. Moore in New York at

To contact the editor responsible for this story: David Scheer at


House of Dimon Marred by CEO Complacency Over Unit’s Risk

By Erik Schatzker, Dawn Kopecki and Bradley Keoun - Jun 13, 2012 5:45 AM GMT+0700

JPMorgan Chase & Co. (JPM) could have spotted trouble at its chief investment office long before traders there racked up at least $2 billion in losses. One reason it didn’t: Chief Executive Officer Jamie Dimon.

June 12 (Bloomberg) -- William Cohan, author of "Money and Power: How Goldman Sachs Came to Rule the World" and a Bloomberg View columnist, talks about the performance of JPMorgan Chase & Co.'s chief investment office under Chief Executive Officer Jamie Dimon. Cohan speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Cohan is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

June 12 (Bloomberg) -- Bloomberg's Erik Schatzker and Stephanie Ruhle report that as traders racked up $2 billion in losses, JPMorgan CEO Jamie Dimon treated the CIO differently from other JPMorgan departments, exempting it from the rigorous scrutiny he applied to risk management in the investment bank, according to two people who have worked at the highest executive levels of the firm and have direct knowledge of the matter. They speak on Bloomberg Television's "Inside Track." (Source: Bloomberg)

June 12 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans talks about Fed monetary policy and the U.S. economy. Evans, speaking with Bloomberg's Betty Liu in Chicago yesterday, said he would support a variety of measures to generate faster job growth, underscoring his preference for more stimulus. (Source: Bloomberg)

June 12 (Bloomberg) -- Paul Miller, an analyst at FBR Capital Markets, talks about the outlook for JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon's testimony tomorrow before the Senate Banking Committee about the bank's $2 billion loss on derivatives trading at its chief investment office. Miller speaks with Scarlet Fu on Bloomberg Television's "InBusiness." (Source: Bloomberg)

June 12 (Bloomberg) -- Bloomberg's Stephanie Ruhle reports that JPMorgan Chief Executive Officer Jamie Dimon will testify before the Senate Banking Committee tomorrow on the company's $2 billion trading loss. She speaks on Bloomberg Television's "Money Moves." (Source: Bloomberg)

June 12 (Bloomberg) -- Bloomberg's Dawn Kopecki reports on JPMorgan's $2 billion trading loss. JPMorgan Chief Executive Officer Jamie Dimon is scheduled to testify before the Senate Banking Committee tomorrow. She speaks on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

Jamie Dimon, chairman and chief executive of JP Morgan Chase and Co. Photographer: Landov

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Dimon treated the CIO differently from other JPMorgan departments, exempting it from the rigorous scrutiny he applied to risk management in the investment bank, according to two people who have worked at the highest executive levels of the firm and have direct knowledge of the matter. When some of his most senior advisers, including the heads of the investment bank, raised concerns about the lack of transparency and quality of internal controls in the CIO, Dimon brushed them off, said one of the people, who asked not to be identified because the discussions were private.

Dimon’s actions contrast with his reputation as a risk- averse manager who demands regular and exhaustive reviews of every corner of the bank. While Dimon has said he didn’t know how dangerous bets inside the CIO had become, the loss on those trades calls into question whether anyone can manage a financial empire as vast as JPMorgan, which became the biggest U.S. lender last year and now has more than $2.3 trillion in assets, larger than the economies of Brazil or the U.K.

“These institutions are too big to manage because even the bank that was considered to be the best-managed turns out to have had a significant glitch,” said Gary Stern, a former president and CEO of the Federal Reserve Bank of Minneapolis and co-author of the 2004 book “Too Big to Fail: The Hazards of Bank Bailouts.”

Testifying Tomorrow

The trading breakdown has undermined Dimon’s authority as a critic of regulatory efforts to curb speculation by deposit- taking banks, and triggered government probes in the U.S. and the U.K. It also cost Chief Investment Officer Ina R. Drew, one of the most powerful women on Wall Street, her job. JPMorgan shareholders saw about $30 billion of market value wiped out through yesterday since Dimon disclosed the loss.

Dimon may have to account for his decisions as soon as tomorrow, when he’s scheduled to testify about JPMorgan’s trading loss before a Senate committee in Washington. The senators, led by South Dakota Democrat Tim Johnson, may ask Dimon why he didn’t ensure that the chief investment office’s risk managers kept pace with the nature of the unit’s business.

Dimon, 56, declined to comment for this article. In remarks prepared for tomorrow’s hearing, he said the CIO “should have gotten more scrutiny from both senior management and the firmwide risk-control function.”

Limits Ignored

The bank’s “fortress balance sheet remains intact,” and the company will be profitable this quarter, he said.

The CIO’s mission includes investing deposits the bank hasn’t loaned. Over the past four years, assets controlled by the unit ballooned fivefold to $374.6 billion in the first quarter, making it one of the largest money managers on Wall Street. Yet the unit was ill-equipped to handle the size and complexity of its credit-derivative portfolio, according to two former CIO executives and one current executive.

As Dimon encouraged the CIO to take more risk in search of profits, the unit raised limits on positions and sometimes ignored them, the former executives said.

London Whale

At the same time, the position of chief risk officer inside the CIO was a revolving door, with at least five executives holding the job in six years, according to people familiar with the matter. Irvin Goldman, appointed in February and replaced in May, had been fired in 2007 by brokerage Cantor Fitzgerald LP for money-losing bets that led to a regulatory sanction of the firm, said three people with knowledge of the matter. Goldman, 51, wasn’t directly accused of wrongdoing.

The division’s London team built up a book of credit derivatives beginning in 2008 that became so large by late 2010 that employees couldn’t unwind it without roiling the markets or incurring large losses, according to current and former executives.

Risk management at the CIO was a world of its own: This year its traders valued some of their positions at prices that differed from the investment bank, people familiar with the situation have said. One trader built up positions in credit derivatives so large and market-moving he became known as the London Whale. It was those bets on credit-default swaps known as the Markit CDX North America Investment Grade Series 9 that backfired and forced JPMorgan to disclose the trading loss.

Elevating Drew

While Dimon allowed risks inside the CIO to mount, members of his board lacked the experience to police it. None of the three people on the board’s risk-policy committee has worked as a banker or had any experience on Wall Street in the past 25 years, and one is a museum director.

Dimon’s push to take greater risks in the chief investment office, first reported by Bloomberg News on April 13, began in 2005, not long after New York-based JPMorgan completed its acquisition of Bank One Corp. and he became CEO.

He created the CIO, elevated Drew from treasurer to chief investment officer, had her report directly to him and encouraged her department, which had invested mostly in government-backed securities, to seek profit by speculating on higher-yielding assets such as credit derivatives, according to more than half a dozen former executives. Sometimes Dimon suggested positions, such as directional bets on economic trends or asset classes, one current executive said.

‘New Vision’

“We want to ramp up the ability to generate profit for the firm,” David Olson, a former head of credit trading for the CIO in North America, recalled being told by two executives when he was hired in 2006. “This is Jamie’s new vision for the company.”

Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. (WFC), the next three largest U.S. banks, say their corporate investment offices follow more conservative strategies and don’t trade credit-default swaps or indexes linked to the health of companies, as JPMorgan is said to have done.

In 2006, Drew hired Achilles Macris, 50, a former co-head of capital markets at Dresdner Kleinwort Wasserstein, to oversee trading in London and carry out Dimon’s mandate to generate greater profits, three former employees said. When JPMorgan acquired Bear Stearns Cos. and Washington Mutual Inc. at fire- sale prices in 2008 and with government support, the CIO’s portfolio more than doubled to $166.7 billion from $76.2 billion the previous year.

Surging Profits

Profits surged as assets swelled. The group started making more exotic trades, betting against an index of subprime mortgage bonds in 2007 that resulted in a roughly $1 billion profit that year, according to one former CIO executive and another person briefed on the trade. The following year, the corporate division, which includes CIO and treasury results, earned $1.5 billion, compared with a net loss of $150 million in 2007. Net income for the division was $3.7 billion in 2009.

As large as those numbers were, they understated the CIO’s real profitability. Because Drew, 55, and her traders invested on behalf of JPMorgan’s deposit-taking businesses, some of the income they generated flowed to other departments, such as the retail bank. Macris’s team in London, running a portfolio of as much as $200 billion in trades, had a profit of $5 billion in 2010 alone, more than a quarter of JPMorgan’s net income that year, one former executive said.

Earnings Impact

The CIO may have contributed as much as 80 cents a share to the company’s earnings, according to estimates by Charles Peabody, an analyst at Portales Partners LLC in New York.

“The issue that is still being underestimated is how much of their core earnings power is going to be reduced by restructuring and reining in that CIO,” he said in a June 4 interview on “Bloomberg Surveillance.”

In addition to making speculative bets, the CIO took on a bigger role after the financial crisis, hedging JPMorgan’s potential losses on loans and corporate bonds by taking positions in credit derivatives.

The question of CIO oversight arose in the months after the crisis, when top JPMorgan executives heard what Macris and his fellow traders in the London office were doing and raised concerns to Dimon that the unit’s risk management was inadequate, according to the two executives familiar with the conversations.

William Winters and Steven Black, co-heads of JPMorgan’s investment bank at the time, were among those who sought more information about the CIO’s changing risk profile, according to people who participated in or witnessed the conversations.

Visibility Lacking

James “Jes” Staley, 55, who ran asset management at the time and now heads the investment bank, and John Hogan, then the investment bank’s chief risk officer, also questioned why risk controls inside the CIO weren’t as extensive or robust as in other departments.

“That’s absurd,” said Kristin Lemkau, a spokeswoman for the bank. Winters, Black and Staley never complained about a specific risk in the CIO, she said. If they had, Dimon’s protocol would have been to gather the relevant data, let them talk to Drew and return to him if they weren’t satisfied with her response, a bank executive said. The operating committee, on which they all sat, also could have reviewed the matter if they still had concerns, the person said.

Hogan, in a statement issued through Lemkau, said he never raised CIO risk practices with Dimon while serving as the investment bank’s chief risk officer. “That’s never happened,” he said in the statement.

Chinese Wall

One sore spot for executives inside the investment bank was the lack of visibility into CIO positions, according to two people with direct knowledge of the matter. While the weekly risk-committee meetings held by the investment bank were open to members of senior management and were attended regularly by Macris and occasionally by Drew, parallel sessions run by the CIO were closed to anyone outside the unit, these people said.

Among the explanations offered for Drew’s autonomy: There was a so-called Chinese wall between the CIO and investment bank because Drew’s unit was also a client, according to one current and two former executives. The CIO used the investment bank to place and process trades. Drew didn’t trust that division to refrain from using the data to its advantage by offering non- competitive prices or by trading against her, according to a former executive who participated in those talks.

It also was widely known within the bank that Winters, 50, and Black, 60, didn’t get along with Drew, according to a current and a former executive.

A person close to the bank offered a different description of the circumstances: While Dimon didn’t adopt a double standard for Drew, he and other senior executives became complacent toward the CIO over time as a result of her track record as a consistent money maker, this person said.

Dimon’s Response

Winters and Black proposed redefining the role of Ashley Bacon, then head of market risk for the investment bank, to extend his oversight to the CIO, a former bank official said. The executives also asked that CIO risks be disclosed in greater detail at review meetings and that other members of the bank’s operating committee be involved in assessing them.

Dimon’s response, one of the people said, was that the situation was under control. It was an answer that one former executive said he got from Dimon again and again, as risks in the CIO grew to potentially perilous levels.

“You really need people who have a very broad view of things both quantitatively and with market knowledge and have the clout within the firm to actually be heard,” said Emanuel Derman, a former head of quantitative risk strategies at Goldman Sachs Group Inc. (GS), a professor at Columbia University and author of “My Life as a Quant” and “Models Behaving Badly.” “To say that it’s OK with the desk is not the right thing to do.”

‘Good King’

In 2009, Dimon fired Winters and relieved Black of operating responsibility. Staley took over as head of the investment bank, and Mary Erdoes, 44, succeeded him at asset management. Winters, Staley and Hogan declined to comment on the discussions. Black didn’t return phone calls seeking comment.

Dimon and what he called his “fortress balance sheet” meanwhile were being lauded by politicians and the media. He steered JPMorgan through the 2008 financial crisis without a single quarterly loss. New York magazine dubbed him “Good King Jamie,” while a biography by Duff McDonald was titled “Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase.”

‘Structural Deficiencies’

“In the wake of the financial crisis, he came to represent this notion that, if well-managed, a bank didn’t need to be regulated all that heavily,” said Rakesh Khurana, a management professor at Harvard Business School in Cambridge, Massachusetts, and author of “Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs.” “That may have contributed to some structural deficiencies in governance and risk management. It probably created the benefit of the doubt to his direction in the board room and probably a lot of deference to his authority in day-to-day operations.”

Drew spent three decades at the firm and its predecessors, helping steer it through the Russian debt crisis and the collapse of hedge fund Long-Term Capital Management in 1998.

At first, she maintained tight control over the CIO’s trades, former colleagues and employees said. She ran the group’s daily 7 a.m. meetings in a seventh-floor conference room at JPMorgan’s headquarters at 270 Park Ave. in Manhattan, according to former traders. She placed strict limits on how much an investment could lose or gain, and traders were required to exit positions if losses exceeded a certain amount, according to one former manager in London and several former traders.

Longer Leash

Macris gave traders a longer leash and imposed fewer controls, according to three former executives. So-called stop- loss limits, which were supposed to trigger an internal review or require a trader to immediately exit a position if losses grew too large, weren’t always enforced, the executives said. Macris didn’t respond to e-mails or phone calls seeking comment.

The shift in risk appetite led to the departures in 2008 of some traders who specialized in more-liquid markets where risk was easier to measure, such as interest-rate products and foreign exchange, three other former CIO executives said. Under Macris, the CIO’s London office bought European mortgage-backed securities, structured credit and other assets that brought higher yields and more risks than the safest short-term Treasury bonds.

Peter Weiland, who graduated from Princeton University with a degree in chemistry and had been overseeing risk for JPMorgan’s proprietary-trading group, was transferred in 2008 into the same role at the CIO. He immediately saw faults in the division’s risk-management system, said two former executives who worked with him.

Boeing 747

While Drew hired traders and quantitative analysts needed for trading, she failed to add the staff, computer models or technology necessary to evaluate the new risks, a former and a current executive said. The risk-management systems and framework designed to spot potential pitfalls, especially in credit derivatives, didn’t keep pace with the portfolio’s expansion, the people said.

Weiland became concerned that Bruno Iksil, the trader in Macris’s office now known as the London Whale, had amassed a complex and illiquid position, according to two former executives. Weiland, who declined to comment, warned Macris and Drew about the trades on numerous occasions beginning in 2010, the people said. It was a topic of frequent discussions in the CIO’s global weekly meetings, they said.

Weiland compared efforts to reduce Iksil’s outsized position to the difficulty of trying to safely land a Boeing 747 without flying lessons, one executive said. The position was so large and illiquid, Weiland said he couldn’t get the plane below 35,000 feet, the executive said.

Changing VaR

Dimon said in his prepared testimony that the plan to reduce the CIO’s credit-derivative trades was “poorly conceived and vetted.”

“The strategy was not carefully analyzed or subjected to rigorous stress-testing within CIO and was not reviewed outside CIO,” he said.

By 2010 Iksil’s value-at-risk, or VaR -- a formula used by banks to assess how much traders might lose in a day -- already was $30 million to $40 million, a person with knowledge of the matter said. At times the figure surpassed $60 million, the person said, about as high as the level for the firm’s entire investment bank, which employs 26,000 people.

Drew, who resigned last month after the CIO losses were announced, was on sick leave for about six months in 2010, during which time Macris and Althea Duersten, head of the CIO for North America, ran the division. The daily meetings were moved to a larger conference room near their new offices on the 10th floor to accommodate about 40 people in attendance. Drew relocated to the executive suites, more than 30 floors higher, to be closer to Dimon.


Drew and Macris agreed to reduce Iksil’s positions and tried to do so beginning in early 2011, according to a current and two former executives. The plan was to work down the book gradually as they found opportunities to sell the assets, these people said. The problem: No one was buying. The position was too large and illiquid and couldn’t be reduced without a loss. Drew and Macris decided the bank could hold the trades to maturity and that the risk of being forced to liquidate them under duress was low, according to the former executives.

Early this year, as the size and volatility of its trades were growing, the bank changed the computer-based mathematical formulas for calculating the chief investment office’s VaR. The new model had the effect of understating the risk of losses from Iksil’s trades: It showed an average daily VaR within the CIO of $67 million, about where it stood in the fourth quarter of 2011.

‘Risk 101’

On May 10, when JPMorgan announced the loss, Dimon said the bank had reviewed the effectiveness of the new model, deemed it “inadequate” and decided to go back to the original model. On that basis, VaR doubled to $129 million. So far, the bank hasn’t disclosed how or when VaR for the CIO unit was changed while the model for the rest of the firm remained untouched. Nor has it explained who sought the change and who approved it.

Unable to unwind Iksil’s bets, the bank tried to hedge them this year with other trades, exacerbating the losses, Dimon said on May 10. Iksil had amassed positions in securities linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market.

Dimon later called it “a Risk 101 mistake.” Shares of the company have dropped 19 percent through yesterday since the losses were announced, and at least half a dozen agencies, including the U.S. Department of Justice and the Securities and Exchange Commission, are investigating.

‘Brightest Angel’

While Dimon hasn’t faced the same public scrutiny that rivals at Goldman Sachs and Bank of America endured after the 2008 credit crunch, the attention surrounding his testimony has echoes with the bank’s own history. In 1933, after Congress was shaken by another financial crisis, J.P. “Jack” Morgan, then CEO of the company, was summoned to testify about preferential treatment that JPMorgan gave certain clients.

The public reaction was “extreme disillusionment: the brightest angel on Wall Street had fallen,” Ron Chernow wrote in his 1990 book, “The House of Morgan.” The scandal “cast it in the mud with other banks.”

The embarrassing disclosures in those hearings led to the Glass-Steagall Act, which forced JPMorgan to split off its investment-banking business from its deposit-taking arm. Dimon’s testimony tomorrow may have a similar effect: Giving ammunition to those who would enforce stricter regulation of banks, including advocates of the Volcker rule, which would bar most proprietary trading by deposit-taking institutions and that the JPMorgan CEO has fought vociferously.


He has said former Fed Chairman Paul Volcker, for whom the rule is named, doesn’t understand capital markets. He quipped that bankers will need psychiatrists to evaluate whether their trades qualify as hedges. Last year he took on Fed Chairman Ben S. Bernanke in a public forum, blaming excessive regulation for slowing a U.S. economic recovery and asking whether anyone has “bothered to study the cumulative effect of all these things.”

Now, his own lapses may come back to haunt him.

“The risk management is as amateurish as you can get on Wall Street,” Nassim Taleb, a professor of risk engineering at New York University and author of “The Black Swan: The Impact of the Highly Improbable,” said in a telephone interview about the bank’s loss. “JPMorgan is vastly more fragile today than it was five years ago, and the system is more fragile today with more too-big-to-fail banks with proven incompetence at their management level.”

To contact the reporters on this story: Erik Schatzker in New York at; Dawn Kopecki in New York at; Bradley Keoun in New York at or @liqquidity on Twitter

To contact the editors responsible for this story: David Scheer at


U.S. Stocks Gain Amid Speculation of More Fed Stimulus

By Rita Nazareth - Jun 13, 2012 3:43 AM GMT+0700

U.S. stocks advanced, rebounding from yesterday’s decline, amid speculation the Federal Reserve will take steps to stimulate the economy and after the European Central Bank endorsed a plan to guarantee bank deposits.

All 10 groups in the Standard & Poor’s 500 Index rose as commodity, financial and industrial shares had the biggest gains. Boeing Co. (BA) jumped 3.5 percent as Sanford C. Bernstein & Co. raised its recommendation. Textron Inc. (TXT) rallied 4 percent as Warren Buffett’s Berkshire Hathaway Inc. agreed to buy planes from the company. First Solar Inc. surged 21 percent after delaying the close of a German plant to meet European demand.

Traders work at the New York Stock Exchange (NYSE) in New York. Photographer: Scott Eells/Bloomberg

June 12 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks advanced, rebounding from yesterday’s decline, amid speculation the Federal Reserve will take steps to stimulate the economy and after the European Central Bank endorsed a plan to guarantee bank deposits. (Source: Bloomberg)

June 12 (Bloomberg) -- Bloomberg’s Trish Regan, Matt Miller and Josh Lipton report on today’s ten most important stocks including Zynga, Facebook and Banco Santander. (Source: Bloomberg)

June 12 (Bloomberg) -- John Stoltzfus, chief market strategist at Oppenheimer & Co., talks about the outlook for the U.S. stock market and his investment strategy stressing dividends. Stoltzfus speaks with Trish Regan and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

The S&P 500 advanced 1.2 percent to 1,324.18 at 4 p.m. New York time, after briefly erasing gains following Fitch Ratings’ downgrade of 18 Spanish banks. The Dow Jones Industrial Average increased 162.57 points, or 1.3 percent, to 12,573.80. Trading volume for exchange-listed stocks in the U.S. was about 6.2 billion shares, 8.6 percent below the three-month average.

“It has been a bit schizophrenic,” said Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott LLC, which manages about $54 billion. “What’s taking place in the Spanish bond market is troubling. Yet pessimism is so high that the prospect of any relief would be enough to jump-start a rally in equities. It seems investors are desperate for continued liquidity injections.”

Stocks rose as Federal Reserve Bank of Chicago President Charles Evans said he would support measures to generate faster job growth. The policy-setting Federal Open Market Committee meets next week. Equities also gained as the ECB backed a European Commission proposal to guarantee deposits.

‘Significantly’ Miss

Earlier today, stocks fell as Spain’s bond yields climbed to a record after Fitch said the nation will “significantly” miss its budget deficit targets. The crisis in Spain, coinciding with the prospect of Greece leaving the euro after elections on June 17, has roiled markets. Benchmark gauges fell yesterday, reversing early gains, as optimism over Spain’s bailout plan gave way to skepticism it will halt the debt crisis.

“We’re going to just keep playing this game until there’s some final outcome of what’s going to happen with the euro,” Tom Wirth, who helps manage $1.5 billion as senior investment officer for Chemung Canal Trust Co., based in Elmira, New York, said in phone interview. “Europe is a total disaster.”

Optimism among global asset allocators “collapsed” this month as Europe’s debt crisis prompted money managers to sell equities and hoard cash to the highest level since 2008, a Bank of America Corp. survey showed.

Underweight Stocks

Respondents, who together manage $522 billion, reduced their holdings in stocks to underweight for the first time in seven months, meaning they now own less than are represented in indexes. Cash balances surged to 5.3 percent in June, the third- highest level on record, while an index of risk and liquidity sank to 30, the lowest level since September 2011.

“It’s not quite maximum bearish, but it’s close,” Bank of America strategists Michael Hartnett and Gary Baker wrote in the report to clients dated today. “Optimism has collapsed back to lows of autumn 2011.”

A two-month decline, which drove the S&P 500 (SPX) to the cheapest valuation since November, gave way to the biggest rally in 2012 last week. Today, measures of raw material, financial and industrial shares in the S&P 500 added at least 1.5 percent.

Alcoa Inc. (AA), the largest U.S. aluminum producer, rose 2.5 percent to $8.52. JPMorgan Chase & Co. (JPM) added 2.9 percent to $33.77. Chief Executive Officer Jamie Dimon plans to testify before Congress tomorrow about his firm’s $2 billion trading loss.

Boeing, Textron

Boeing climbed 3.5 percent to $72.58. The world’s largest aerospace company was raised to outperform from market perform by Sanford C. Bernstein analyst Douglas Harned. The 12-month share-price estimate is $92.

Air Lease Corp., the aircraft leasing company run by Steven Udvar-Hazy, is considering the purchase of 60 to 100 Boeing 737 Max aircraft with advanced engines as the company builds its fleet of single-aisle jets.

Textron rallied 4 percent to $24.52. Berkshire Hathaway’s NetJets division placed a record order valued at $9.6 billion with Textron and Bombardier Inc. The transaction covers as many as 150 Citation Latitude jets from Textron.

First Solar surged 21 percent, the most since 2009 (FSLR), to $14.95. The company is increasing production at its factory in Frankfurt an der Oder, Germany, and will scale back in the fourth quarter, Brandon Mitchener, a spokesman for Tempe, Arizona-based First Solar, said today.

Record Gain

A123 Systems Inc. surged a record 52 percent to $1.58. The maker of electric-car batteries said it has developed an improved lithium-ion cell that it says can cut costs of rechargeable and hybrid vehicles.

Michael Kors Holdings Ltd. (KORS) gained 7.7 percent to $41.10. The luxury-goods company forecast earnings and sales that exceeded analysts’ estimates.

Arena Pharmaceuticals Inc. (ARNA) rallied 11 percent to $7.88 as investors anticipate the company’s weight-loss pill will win U.S. regulatory approval.

Facebook Inc. (FB) rose 1.5 percent to $27.40. The company’s marketing and advertising services encourage users to purchase products in stores and online, ComScore Inc. said, countering criticism and research that questioned social-ad influence.

Zynga Inc. (ZNGA) dropped 10 percent to $4.98, a record low. The biggest maker of games played on Facebook fell after analysts at Cowen & Co. said daily active users for its social gaming declined 8.2 percent in May.

‘Volatile’ Economy

FactSet Research Systems Inc. (FDS) slumped 12 percent, the most since 2001, to $91.70. The provider of financial data forecast fourth-quarter revenue and profit that trailed analysts’ estimates, citing the “volatile” economy. FactSet Research competes with Bloomberg LP, the parent of Bloomberg News.

PNC Financial Services Group Inc. (PNC) slid 1.2 percent to $57.50. The seventh-largest U.S. commercial bank by deposits said it will boost reserves by $350 million to cover demands for refunds on faulty mortgages.

Harman International Industries Inc. (HAR) retreated 3.9 percent to $36.53, dropping 8.9 percent in two days. The maker of car audio and entertainment systems fell after Apple Inc. (AAPL) said yesterday it is working with automakers to put a Siri voice- command button onto steering wheels. Harman said Apple is a partner, not a rival.

The S&P 500 is still mired in a “bottoming phase” after this year’s best weekly rally failed to reverse a downtrend in companies that are most-tied to economic swings, RBC Capital Markets Corp. said.

Price Ratio

While the benchmark measure for U.S. equities jumped 3.7 percent last week, the relative price ratio of the Morgan Stanley Cyclical Index to the firm’s consumer index stayed below a downward-sloping trend that’s been in place since March. The cyclical index includes commodity and transportation stocks such as Alcoa and FedEx Corp., while the consumer gauge tracks companies that sell necessities such as Wal-Mart Stores Inc.

“If a broader low is developing in the market, then the relative performance of cyclicals versus non-durables should reverse its three-month downtrend,” Robert Sluymer, a New York- based analyst with RBC, wrote in a note today. “So far the trend remains down. We expect equity markets to back and fill over the coming one to two weeks before again trying the upside.”

To contact the reporter on this story: Rita Nazareth in New York at

To contact the editor responsible for this story: Nick Baker at


Buffett Pounces in Private-Jet Slump With $9.6 Billion

By Thomas Black and Noah Buhayar - Jun 13, 2012 3:41 AM GMT+0700

Warren Buffett’s Berkshire Hathaway Inc. jumped into the slumping private-jet market again with a record order valued at $9.6 billion, betting on a rebound later this decade with a third plane purchase in less than two years.

A Bombardier BA Learjet 45 XR in flight. Photographer: by Paul Bowen/Bombardier Inc.

Warren Buffett, chairman of Berkshire Hathaway Inc. Photographer: Andrew Harrer/Bloomberg

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Buying as many as 425 jets from Bombardier Inc. and Textron Inc. (TXT)’s Cessna will bolster Berkshire’s NetJets in “a long-term bet on the global economy,” Chief Executive Officer Jordan Hansell told Betty Liu in an interview today on Bloomberg Television’s “In The Loop.”

Deliveries will start as soon as two years from now as NetJets refreshes and looks to expand a fleet of more than 700 planes. The Columbus, Ohio-based company probably won favorable terms as planemakers work to rebuild order backlogs, said Michel Merluzeau, an aviation consultant for G2 Solutions in Seattle.

“This is a favorable time to buy,” Merluzeau said yesterday in a telephone interview. “It’s a good demonstration of the anticipation of cycles.”

NetJets’ transaction covers as many as 275 Bombardier (BBD/B) Challenger aircraft, including 100 firm orders. The Cessna portion of the deal consists of as many as 150 Citation Latitude jets, of which 25 orders are firm, according to a statement. Bombardier deliveries will begin in 2014, and the Cessnas will start arriving in 2016, NetJets said.

“It’s prudent to take a stand now and make a decision now to be sure that we’re well positioned to compete over the longer term,” Hansell said on a conference call late yesterday.

Largest Order

The order is the largest ever for business aircraft, according to NetJets, eclipsing the $6.7 billion list value for the company’s March 2011 purchase of as many as 120 Bombardier planes. In October 2010, NetJets agreed to buy as many as 125 Embraer SA (EMBR3) Phenoms, with a list value of $1.05 billion.

NetJets’ previous two deals were rare bright spots for a global business-jet industry that saw the value of deliveries tumble 29 percent from a 2008 peak through 2011, according to a report published in April by consultant Teal Group.

“All the manufacturers want to make a deal today,” said Janine Iannarelli, president of Houston-based plane broker Par Avion. “They’re able to secure significant discounts because they are fleet orders. You wield a lot of power when you go in and place an order like that.”

Fleet buyers typically pay less than catalog prices, and neither planemakers nor customers disclose those terms. The $9.6 billion value for the order is based on list prices for the jets, Hansell said, without giving further details.

NetJets’ Fleet

Hansell is building on steps taken by predecessor David Sokol to strengthen the fleet after the company cut back by about 20 percent since the end of 2008 as demand fell for luxury travel. The business-jet industry typically rests on three pillars: operators such as NetJets, corporate buyers and wealthy individuals.

“A portion of what we’ve ordered will replace our current fleet, and a portion of it could be used to expand it,” Hansell said in the Bloomberg Television interview. “We’re placing a long-term bet on the global economy.”

The U.S. is seeing a slow rebound in its housing market that, once completed, will help drive global economic growth and air-travel demand, Hansell said today. NetJets is “relatively optimistic” about China’s economy while Europe, which is struggling with a debt crisis, will “figure out its troubles within a time frame that makes sense,” he said.

Bigger Planes

Ordering Challengers and Citations brings NetJets a bigger class of executive aircraft after the previous Bombardier deal, which was for planes in the Montreal-based company’s Global series, and the purchase of Embraer’s Phenoms.

“By increasing the range and endurance of our fleet, we will allow our owners to get to even more destinations worldwide,” Hansell said in the statement.

Bombardier, the world’s largest business-jet maker, surged 6 percent to C$3.87 at 4 p.m. in Toronto, while Providence, Rhode Island-based Textron rose 4 percent to $24.52 in New York. Omaha, Nebraska-based Berkshire (BRK/A) climbed less than 1 percent to $121,740.

NetJets showed “confidence in the growing strength and long-term outlook of the global economy and the aviation industry,” Cessna CEO Scott Ernest said today in a statement.

Bombardier said the order included an aftermarket support agreement with a value of as much as $2.3 billion if all aircraft options are exercised.

Bombardier Production

For Bombardier, the order is equal to about four years of Challenger production, said Walter Spracklin, an analyst with RBC Capital Markets in Toronto, who has an outperform rating on the Canadian planemaker’s stock.

“This gives significant visibility into their product backlog for the Challenger series and will give them the comfort they need to raise production levels,” Spracklin said.

Bombardier’s Challengers can carry as many as 12 people, depending on the model and the cabin configuration, according to the planemaker’s website. Cessna’s Citation can fly as many as eight passengers, according to a company statement.

Larger business jets have been the industry’s strongest segment in recent years, buoyed by “high net-worth individuals in emerging markets,” Joseph Nadol, a JPMorgan Chase & Co. analyst in New York, said in a note yesterday. The NetJets order is a “positive development” even as a slowing global economy stokes concern that demand may wane for private jets, he wrote.

To contact the reporters on this story: Thomas Black in Dallas at; Noah Buhayar in New York at

To contact the editors responsible for this story: Ed Dufner at; Dan Kraut at