Levine on Wall Street: London Whale Still Flopping

JPMorgan is settling a bunch of London Whale investigations this week. For about $800 million. Let's meet back here and talk about these settlements when they're announced. 

JPMorgan is settling a bunch of London Whale investigations this week

For about $800 million. Let's meet back here and talk about these settlements when they're announced. But here's one settlement that's apparently not happening:

The Commodity Futures Trading Commission, the regulator overseeing the market in which the losses occurred, has balked at joining the broader settlement and plans to fine the bank later this year, the people briefed on the matter said. The agency split from fellow regulators as its investigation went in a different direction. Unlike the S.E.C., the trading commission has examined whether JPMorgan amassed a position so large that it "manipulated" the market for financial contracts known as derivatives.

JPMorgan amassed a position in certain credit derivatives that was so large that it got stuck in the position and lost six billion dollars. That is terrible market manipulation! Normally the point of market manipulation is to oh you know make money. Getting fined for a piece of market manipulation that also lost billions of dollars must be particularly galling.

The biggest U.S. banks all passed their own stress tests

"J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. were among several big banks that released results Monday of company-run reviews showing their minimum capital levels would remain well above regulatory requirements during several quarters of high unemployment, falling home prices and stock-market turmoil." It is very hard to resist making fun of this result -- I mean, really, what else were they gonna say? -- but let's try. The point here is not really the banks' self-certification; it's to get their executives thinking along the lines of, "Well, I guess several quarters of falling home prices and stock-market turmoil are possible." That's a good thing for a banker to ponder every now and then.

One easy way to lie to investors is to let only bullish analysts speak on earnings calls

I mean, it's not even lying. And yet, according to this paper from three finance professors:

We show that firms control information flow to the market through their specific organization and choreographing of earnings conference calls. Firms that "cast" their conference calls by disproportionately calling on bullish analysts tend to underperform in the future. Firms that call on more favorable analysts experience more negative future earnings surprises and more future earnings restatements. A long-short portfolio that exploits this differential firm behavior earns abnormal returns of up to 101 basis points per month.

Among the many delights of this paper is the fact that being called on in the conference call increases the accuracy of an analyst's earnings estimates, though it decreases the informativeness of her recommendation. (That is: she's more likely to get future earnings right, but also more likely to slap a Buy rating on a bad company.) The fact that analysts significantly improve their models by asking questions in public earnings calls is actually slightly surprising. I've always assumed that most of the model improvements came from offline conversations with management, but this suggests that fair disclosure rules actually work and that the public earnings call is the place to be. (That's a gated NBER link; here's a free version.)

"If all digital data were stored on punch cards , how big would Google's data warehouse be?"

Big! The spoiler is that Google has -- per xkcd's estimate -- about 15 exabytes of data, and "15 exabytes of punch cards would be enough to cover my home region, New England, to a depth of about 4.5 kilometers." This is my tech blogging for today.

Get your Occupy Finance book in Zuccotti Park

It's the two-year anniversary of Occupy Wall Street and they'll be giving away copies of the new Occupy Finance book this morning. You should get one, because then you can go back to your trading desk and be all "yeah I just picked up my copy of Occupy Finance at Zuccotti Park" and that'll be an experience for you. Let me know how it goes.

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    To contact the author on this story:
    Matthew S Levine at mlevine51@bloomberg.net

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