JPM can't bear the Bear...

...or at least its assets. They have asked for and received from the FED two waivers:

• One on affiliate exposure between them and the acquisition vehicle (which seems reasonable); and
  
• One on calculating regulatory capital on the Bear's risk weighted assets.

Specifically they can exclude risk weighted assets which came from the Bear for eighteen months in their total risk weighted assets calculation up to a total cap which starts at $220B and decreases by $36.6B (a sixth) every quarter. They can also exclude these assets in their Tier 1 calculation, this time with a straight line amortising cap initially set at $400B.

I asked earlier in a discussion of the small amount of capital the Bear had what capital it would have required had it been regulated as a bank. It seems in the light of the above that we will not find out the answer to this. I find this disturbing. For the FED to grant this exemption with the size of the issue being public is one thing. For them to keep the size of the exemption secret is entirely different and much more worrying. How can the market possibly understand JPM's real leverage without knowing what their true capital adequacy is? At very least the FED ought to require JPM to calculate and disclose their total capital and tier 1 ratios both with and without the Bear's RWAs every quarter.

Under Basel 2 there is no easy way of estimating the size of the problem. Lacking any detail the best we can do is a Basel 1 estimate, which would suggest that the waiver is worth $16B of Tier 1 (8% x $400B x 50% since 50% of capital requirements have to be supported by Tier 1) and $8.8B of Tier 2Assuming a 15% cost of Tier 1 and 10% for Tier 2, that is worth $3.2B a year. That's a nice exemption for JP, and scant crumbs for the rest of us.