Meet the JPMorgan Whale that Ate Deutsche Bank’s Stock Trading Business

By Pam Martens and Russ Martens: July 8, 2019 ~

Yesterday, Deutsche Bank announced it would be cutting its payroll by approximately 18,000 jobs over the next three years and exiting its stock trading business, along with other restructuring moves like creating a “bad bank” to hold toxic assets.

What could possibly force a global bank to shed stock trading? According to the most recent report from the Office of the Comptroller of the Currency (OCC), the regulator of national banks in the United States, four U.S. commercial banks made $8.79 billion in trading revenues in the first quarter of this year. Of that amount, JPMorgan Chase Bank NA represented 60 percent or $5.29 billion. (The other three banks were Citibank, Goldman Sachs Bank USA and Bank of America.)

Just to be clear, this is not how much each bank made from trading in all their divisions, this is just how much the banks made trading in their federally-insured, taxpayer-backstopped commercial bank, which in a rational world would not be allowed to make high-risk wagers in derivatives and the stock market.

When it came to stock trading (equity trading), JPMorgan Chase Bank NA really sticks out like a sore thumb. All 5,362 commercial banks and savings associations in the U.S. had stock trading revenues in the first quarter of $2.9 billion, of which just the four banks listed above represented $2.8 billion. And of that $2.8 billion in stock trading revenues, JPMorgan Chase Bank NA captured $2.3 billion or 82 percent. It captured 79 percent of all of the equity trading revenues for all 5,362 banks and savings associations in the U.S.

JPMorgan’s stock trading prowess was so overwhelming that Goldman Sachs Bank USA actually lost $63 million trading stock in the first quarter.

If Goldman Sachs Bank USA is having trouble making money trading stocks versus JPMorgan Chase Bank NA, it would seem to follow that Deutsche Bank might be having the same problem.

There are two reasons behind JPMorgan’s outsized performance. One reason is captured in this 300-page report by the U.S. Senate Permanent Subcommittee on Investigations’ into the London Whale trading scandal at JPMorgan Chase where it used hundreds of billions of dollars of its bank depositors’ money to engage in risky trading gambles out of London and lost at least $6.2 billion of depositors’ money.

As a result of that episode, the OCC issued a cease and desist order against JPMorgan Chase, finding the following: “inadequate oversight and governance to protect the bank from material risk, inadequate risk management processes and procedures, inadequate control over trade valuation, inadequate development and implementation of models used by the bank, and inadequate internal audit processes.”

The Senate report also referred to JPMorgan Chase’s equity trading in numerous passages but the bulk of that was redacted so that the American people still have no idea what was really going on. (See Senate Censors Part of Report on JPMorgan About Its Stock Trading.)

Despite an FBI investigation into the matter, the bank was never criminally charged for its London Whale conduct. It did end up paying over $1 billion in fines and settlements, however.

Despite that, U.S. regulators are still allowing massive trading to be taking place in JPMorgan Chase’s federally-insured commercial bank according to the OCC data, including exposure to $59 trillion notional (face amount) in derivative trades.

The other reason that JPMorgan may have a sizeable advantage in stock trading is its 30,000 programmers and information technology employees. Yes, 30,000, according to CEO Jamie Dimon in his 2014 letter to shareholders.

In a prior interview with Anish Bhimani, then Chief Information Risk Officer at JPMorgan Chase, the Information Networking Institute at Carnegie Mellon quoted Bhimani stating that JPMorgan Chase has “more software developers than Google, and more technologists than Microsoft…we get to build things at scale that have never been done before.”

Since the majority of today’s stock trading is all about algorithms, artificial intelligence, co-location of bank computers’ next to the stock exchange computers to provide a speed advantage in trading, faster and faster trading data feeds that only the bulge bracket banks and hedge funds can afford, and dark pool trading out of the gaze of regulators — 30,000 techies can really give one an edge.

But before you get too comfortable with the notion that it’s okay if an American bank is beating the socks off a German bank, you need to remember two things: Deutsche Bank is a major derivatives’ counterparty to most of the big banks on Wall Street according to a 2016 report from the International Monetary Fund — its health, or lack thereof, could spill over onto Wall Street; and, secondly, there’s nothing to prevent another London Whale-style trading fiasco from blowing a hole in JPMorgan Chase’s federally-insured bank – putting you, the taxpayer, at risk.