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PMorgan Chase & Co. (JPM) s holdings of home-loan bonds fromoutside the U.S. soared 35-fold in the past three years. Now, withits chief investment office facing scrutiny after a $2 billiontrading loss, investors are raising concern the European market sbiggest buyer will pull back. The largest U.S. bank by assets accelerated its purchases lastquarter, adding $8.5 billion to lift its total to $74.5 billion,according to regulatory filings. The New York-based company sinvestments approached 9 percent of the size of the Dutch and U.K.mortgage-bond markets it s been focusing on. If they stop buying, it would be pretty bad as they are one ofthe major buyers at the moment, said Frank Erik Meijer, head ofasset-backed securities at The Hague-based Aegon Asset Management,which manages 220 billion euros ($280 billion). If they need tosell, that would certainly give rise to quite some increases inyields relative to benchmark rates. JPMorgan bolstered prices and issuance when Europe s lenders wereforced to shrink and other potential buyers shunned asset-backednotes after U.S. subprime mortgage debt sparked a global creditcrisis, according to six people at banks and investment firmsactive in the home-loan bond market who declined to be identifiedbecause they were speaking about a competitor. Chief ExecutiveOfficer Jamie Dimon, 56, last month described the securities aspart of the chief investment office s very conservative holdings, four weeks before announcing an unrelated $2 billionderivative loss that highlighted the division s influence incertain credit markets. Brian Marchiony, a spokesman for JPMorgan in London, declined tocomment. Deposits Incresed As the global economic slump limited loan demand and increaseddeposits across the banking industry, securities held inJPMorgan s chief investment office and treasury more than tripledto $374 billion as of March 31, from $76.5 billion since 2007,filings show. The European mortgage investments began to jump in2009, starting that year at $2.1 billion and rising to $47.1billion by the end of 2010. The bank has been the lead investor, or among the biggest buyers,of deals backed by loans from banks including Royal Bank ofScotland Group Plc (RBS), Lloyds Banking Group Plc (LLOY), BancoSantander SA (SAN) s U.K. unit, ING Groep NV (INGA) and Aegon NV(AGN) in the Netherlands. Transactions, particularly in 2009 and2010, often began with potential issuers calling the bank, three ofthe people said. Revived Market Lloyds revived the European securitization market in September,2009, after a more than yearlong freeze. JPMorgan bought orcommitted to buy 2.25 billion pounds ($3.6 billion) of notes issuedby Lloyds vehicles and Nationwide Building Society issuanceentities. JPMorgan approached Lloyds to issue the bonds and provided thecatalyst for us to start work on a new transaction as we then knewthere was a deal to be done, Robert Plehn, the London-based headof securitization at Lloyds s Bank of Scotland unit, said at thetime. The U.S. bank s order probably provided other investorswith some confidence to buy, he said. JPMorgan has also bought outstanding securities tied to home loansoriginated by Northern Rock Plc, the British lender rescued by theBank of England in 2007, two of the people said. Those purchasesmeant it was bolstering the market even more than the volume of itsbuying suggested because the debt, among the most liquid of itstype, is used as a market benchmark. Large Player They have been since the crash a very large player in themarket, said Ronald Thompson Jr., a Greenwich, Connecticut- basedconsultant on asset-backed securities, and former head of strategyon the debt at Knight Libertas LLC. You ve always got to beconcerned if there s a large player that it s a potential problemif they go away. JPMorgan s chief investment office, which invests its excess cashand hedges its risks, failed in using synthetic credit bets toprotect against a stressed credit environment, the bank says,such as a deepening of Europe s debt crisis. Dimon announced itsloss on May 10, describing the handling of the positions as flawed, complex, poorly reviewed, poorly executed and poorlymonitored. The disclosure has prompted investigations by the U.S. Departmentof Justice, the Federal Bureau of Investigation, the Securities andExchange Commission, the Commodity Futures Trading Commission andthe U.K. s Financial Services Authority. Senate Testimony Dimon has been asked to testify before a U.S. Senate committee onthe loss, which has prompted the Federal Reserve Bank of New Yorkto examine how banks across its district are managing a wave ofdeposits that has flooded the financial system since the creditcrisis, according to a person familiar with the matter. At JPMorgan, Ina Drew, 55, the chief investment officer starting in2005 who reported directly to Dimon, retired this month. MattZames, 41, replaced her, shaking up the division s leadership andannouncing in a May 14 memo a sharp, renewed focus on our hedgingstrategies, risk management and execution. Dimon has sought to allay investor concern that the bank will dosomething stupid as a result of the upheaval. We will do what we have to do to maximize the shareholdervalue, Dimon said on a May 10 conference call, talking aboutunwinding the derivative bets. We ve got staying power and weare going to use it. Unlike the company s derivatives positions, gains and losses onthe securities holdings typically don t affect its earningsbecause of accounting rules. Unrealized Gains While it had about $8 billion in unrealized gains within its bondportfolio at the end of March, and sold debt to reap $1 billion ofthose this quarter, sales are usually tax- inefficient, so we revery careful about taking gains, Dimon said. JPMorgan may at least test the liquidity of its European mortgagebonds with sales, even if it doesn t otherwise shift its strategy,one of the people said. The chief investment office s push into risk-taking was led byAchilles Macris, 50, according to three former employees, BloombergNews reported on April 13. He was hired in 2006 as its topexecutive in London and led an expansion into corporate andmortgage-debt investments to generate profits, they said. The banksaid May 14 that Macris would hand off his duties. Those in London given the task of adding European mortgage- backedsecurities include Anthony Brown, Francois Brochard and SwenNicolaus according to two of the people. Unrealized Losses Analysts such as Morningstar Inc. s Jim Leonard and investorsincluding John Kerschner, Janus Capital Group Inc. s head ofsecuritized products, said when Bloomberg News reported theexpanded holdings on Feb. 23 that the types of bonds JPMorgantargeted represent generally safe long-term bets, since they areamong the most senior-ranked in deals. The bank had unrealized losses of $273 million on the bonds as ofMarch 31, down from $530 million on Sept. 30, according to itsfilings. Substantially all of these securities carry ratings ofAAA, AA or A, and they are primarily from the U.K. andNetherlands, it said in the filings. Those figures were gross amounts, meaning similar holdings could be worth more than purchaseprices. Unrealized gains totaled $657 million. Its portions of deals can withstand losses of about 10 percent onthe underlying mortgages because other classes will take writedownsfirst. JPMorgan said it projects lifetime losses of 1 percent. Theso-called credit enhancement on U.K. bonds it bought in October was22.4 percent of losses. U.K., Dutch Markets The market for U.K and Dutch home-loan bonds totals 691 billioneuros, according to the data from the bank s analysts. The broaderEuropean market s size is 1.2 trillion euros. Homeowners from the U.K. and Netherlands are considered the mostcreditworthy in Europe by bond investors, even with the U.K.returning to recession in the first quarter and Dutch home pricesset to drop about 5 percent this year because of the region s debtcrisis and stricter mortgage lending rules, according to a Januaryforecast by Nederlandse Vereniging van Makelaars, which representsproperty brokers. Investors are demanding 138 basis points more than benchmark ratesto hold Dutch mortgage notes and 132 basis points extra for Britishsecurities. That compares with a spread of 600 basis points forSpanish bonds. A basis point is 0.01 percentage point. While JPMorgan remains important to issuance, a shift tostructuring U.K. deals with U.S. dollar-dominated classes throughthe use of currency swaps may mitigate the impact of any retreat bythe bank, one of the investors said. Citigroup Emerging Reliance on JPMorgan has been declining since the investor baseis expanding especially in the U.S. but still it s a big player, Aegon s Meijer said. Citigroup Inc. (C) is emerging as a bigger buyer from the U.S.,increasing its holdings of residential-mortgage securities fromelsewhere by $1.7 billion in the first three months of this year to$9.8 billion, according to a company filing. Shannon Bell, aspokeswoman for the New York-based, declined to comment. The market got a test with a May 16 sale of about $3.6 billion ofsecurities by Santander s U.K. unit, with slices in pounds, yenand U.S. and Australian dollars. The lender s Fosse MasterIssuer s $700 million portion with an average life of 5 years waspriced at 150 basis points above the London interbank offered rate,or Libor, according to Bloomberg data. That was in line with marketing guidance from underwriters andcompares with a spread of 155 basis points on $1.25 billion ofbonds with a similar expected duration sold in April by the lenderfrom its Holmes program. The transaction shows that it is possible to sell a deal withoutone particular anchor investor, said Patrick Janssen, a fundmanager at M&G Investments in London, which manages 20 billioneuros of asset-backed securities. Top-rated U.K and Dutch RMBSare perceived as a safe haven with a yield pickup so the investorbase is growing. Bob Paterson, head of asset-backed securities syndication atLloyds, said the market has been rather stable in terms ofperformance and pricing. With strong structural support and soundasset quality we don t anticipate this changing. We are high quality suppliers, our products such as Heated Clothing Battery Manufacturer , External Universal Battery Manufacturer for oversee buyer. To know more, please visits IPC Battery.
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