The question is will the structured finance market go back into a deep freeze if the losses in other parts of the chief investment office's portfolio cause JP Morgan to cut back on its purchases of these securities.
While many in the market were last week revelling in the discomfort caused to JP Morgan by the losses at its chief investment office, those working in European structured finance found it difficult to enjoy what has become known as “Dimonfreude”.
Rather, they were wondering anxiously whether the losses might alter the unit’s buying strategy when it comes to European structured paper.
The CIO is the biggest buyer of European structured product and any pull-back from the market, caused either by a new strategy or by a series of sales to offset the losses, might prove disastrous for European securitisation.
Indeed, the CIO almost single-handedly resuscitated the European RMBS market in 2009, buying huge chunks of new issues and providing repo agreements on others.
Any change to this strategy could undermine the sector’s ability to absorb large primary market deals.
One trader said it could have a “pronounced effect” on the market, which “doesn’t have too many others to take up the slack”.
As one fixed-income head said, when selling European structured finance, the JP Morgan CIO “is your first call, your second call, your third call and your fourth call.” “There are real questions about the strength of the market if they’re not there,” he added.Please re-read the highlighted text as it confirms the continuation of the buyers' strike.
Regular readers know that the buyers are on strike until structured finance securities provide current disclosure on an observable event basis so they can know what they own.
The CIO became a cornerstone investor of the European structured finance market in 2009, starting with Permanent 2009-1 from Lloyds. A number of other large investments followed in the UK and Dutch markets, as well as a number of repo agreements to finance retained tranches such as those in Italy.
A pull-back could have ramifications for certain issuers bringing new issues. One structured finance specialist, for example, cited the example of Dutch RMBS where the investor community had a clear preference for the shorter bonds last year. These originators “had trouble placing longer tranches. Without that [CIO involvement] they wouldn’t have got deals away,” he said.
In its 10-Q quarterly SEC filing, JP Morgan said its US$74.902bn of fair value “available for sale” non-US RMBS “primarily represent mortgage exposures in the United Kingdom and the Netherlands”.Since JP Morgan is the largest buyer of these securities, I wonder who would pay JP Morgan $74.9 billion for the securities?