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Regulators’ ’You Flunk’ Letter to JPM Chase Was Strongest Warning

April 15, 2016 (EIRNS)—When the Federal Reserve and Federal Deposit Insurance Corporation on April 13 rejected as not credible or workable, the living wills of five of the six biggest U.S. banks, their letter to JPMorgan Chase was unique, and ominous. As reviewed in an expert column by analysts Pam and Russ Martens today, the letter contained a warning to JPM Chase that it is threatening the entire U.S. economy, accompanied by a considerable amount of redacted material in the Fed’s released text.

The Martens write:

"At the top of page 11, the Federal regulators reveal that they ’have identified a deficiency in JPMorgan’s wind-down plan which, if not properly addressed, could pose serious adverse effects to the financial stability of the United States.’"

Problem number one is liquidity (also cited by the regulators in flunking Bank of America and State Street Bank, and by the FDIC in flunking Goldman Sachs).

"JPMC does not have an appropriate model and process for estimating and maintaining sufficient liquidity at, or readily available to, material entities in resolution,"

the letter says. "JPMCs liquidity profile is vulnerable to adverse actions by third parties."

And further on some of those third parties, the Martens quote that,

"The regulators expressed the further view that JPMorgan was ‘placing too much reliance on funds in foreign entities that may be subject to defensive ring-fencing during a time of financial stress.’ The use of the term ring-fencing suggests that the regulators fear that foreign jurisdictions might lay claim to the liquidity to protect their own financial counterparty interests or investors."

This is clearly referring to JPM Chase’s huge exposure to financial derivatives contracts, involving collateral and short-term deposits which can be seized in a crisis, dooming a bank’s liquidity—the "Lehman/AIG experience."

The regulators complained that JPMC failed to provide any

"narrative describing at least one pathway for winding down the derivatives portfolio, taking into account a number of factors, including the costs and challenges of obtaining timely consents from counterparties and potential acquirers (step-in banks)."

They wanted to see,

"the losses and liquidity required to support the active wind-down of the derivatives portfolio incorporated into estimates of the firm’s resolution capital and liquidity execution needs."

JPMC had clearly provided nothing, and its nominal derivatives involvement is $51 trillion.

Furthermore, 69% of that is over the counter derivatives, not cleared on any exchange—typical for the Wall Street Big Six. President Obama recently lied when he claimed about derivatives on March 7: "you have clearinghouses that account for the vast majority of trades taking place."

Perhaps most important to the regulators’ letter, JPMChase has been found, in a study by the Treasury’s Office of Financial Reporting, to have the highest "contagion risk that the bank poses for the financial system," of any Wall Street bank.