JP Morgan's "Whale" of a trade

[Jan Klimkowski]

So, JP Morgan, the very heart of global finance, the Big Beast of WASP capitalism, is in the hole big time:

JP Morgan chief reveals $2bn trading loss caused by 'sloppiness'

Chief executive Jamie Dimon issues apology to stock analysts over company's 'embarrassing' errors and 'bad judgment'

Jill Treanor and agencies

guardian.co.uk, Friday 11 May 2012 07.50 BST

JP Morgan Chase, America's biggest bank, issued a surprise trading update after US markets had shut on Thursday, admitting it had incurred $2bn (£1.2bn) of trading losses in the past six weeks.

Jamie Dimon, chief executive of the bank which was praised for its handling of the 2008 banking crisis, cited "sloppiness" "bad judgment" and "many errors".

During a hastily arranged conference call, he described the mistakes as "egregious". The bank expects to take an additional $1bn in losses in the second quarter and said the losses occurred in its chief investment office, a part of the bank intended to manage risks. The trading position causing the losses involved credit default swaps, which insure against losses when companies or governments collapse.

In after-hours trading, JP Morgan Chase shares fell almost 7% and dragged other banks such as Citigroup and Bank of America lower.

Dimon said: "The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought. There were many errors, sloppiness and bad judgment."

The trading loss is an embarrassment for a bank that came through the 2008 financial crisis in much better health than its peers. It kept clear of risky investments that hurt many other banks.

The loss came in a portfolio of the complex financial instruments known as derivatives, and in a division of JP Morgan designed to help control its exposure to risk in the financial markets and invest excess money in its corporate treasury.

Bloomberg reported in April that a single JP Morgan trader in London, known in the bond market as "the London whale," was making such large trades that he was moving prices in the $10tn market.

Dimon said the losses were "somewhat related" to that story, but seemed to suggest that the problem was broader. Dimon also said the company had "acted too defensively," and should have looked into the division more closely.

The Wall Street Journal reported last month that JPMorgan had invested heavily in an index of credit-default swaps, insurance-like products that protect against default by bond issuers.

Hedge funds were betting that the index would lose value, forcing JPMorgan to sell investments at a loss. The losses came in part because financial markets have been far more volatile since the end of March.

Partly because of the $2bn trading loss, JPMorgan said it expected a loss of $800m this quarter for a segment of its business known as corporate and private equity. It had planned on a profit for the segment of $200m.

The loss is expected to hurt JPMorgan's overall earnings for the second quarter, which ends on 30 June. Dimon apologised for the losses, which he said occurred since the first quarter, which ended 31 March.

"We will admit it, we will learn from it, we will fix it, and we will move on," he said.

Among other bank stocks, Citigroup was down 3.3% in after-hours trading, Bank of America was down 2.9%, Morgan Stanley was down 2.4%, and Goldman Sachs was down 2.2%.

So far, the official story is tedious and familiar.

Then Market Ticker's Denninger cuts to the chase by identifying that Morgan's ridiculous "whale" of a trading position is still live

Why The JPM Trade Matters

We've all heard about the JP Morgan "rogue" trade by now -- the "hedge" that was not really a hedge.

But what's not been discussed are two aspects of this -- that this is a "slow burn" sort of story, and second, how it came to happen in the first place.

Let's deal with the first -- the "whale" trade was first reported in April. It "simmered" until it blew up into a huge mess yesterday.

The problem is the position is still on and now everyone knows that JP Morgan has this position and it's going against them. Expect people to press into this.

And draws the obvious conclusion about unregulated market capitalism:

But the real problem is found in how the bank got this position on and funded it in the first place. That's a problem.

There is no solution to this issue found in the current paradigm for banking. As I have often put forward the only fix is to enforce a "One Dollar of Capital" standard for all banks that want to do business in the United States, demanding that any institution with banking exposure here adhere to this rule.

We continue to see example after example that even after 2008 there is no regulatory supervision that matters over these firms. The only way to prevent bad behavior such as this is to make it unlawful and enforce the posting of the bank's capital against all unbacked positions, without exception.

[Jan Klimkowski]

Zero Hedge, and even Bloomberg, hmmmm..... add:

Why What Jamie Dimon Doesn't Know Is Plain Scary

Submitted by Tyler Durden on 05/11/2012 10:40 -0400


Bloomberg's Jonathan Weil rips the lies emanating from Jamie's mouth, a new one.

What Jamie Dimon Doesn't Know Is Plain Scary

Could Jamie Dimon really be as clueless as he sounded on the phone yesterday?

Last month, after Bloomberg News broke the story that JPMorgan Chase & Co. (JPM)'s chief investment office had, in essence, become a ticking time bomb, Dimon, the bank's chief executive officer, called the press coverage "a complete tempest in a teapot." That explanation no longer works.

Yesterday, Dimon changed tacks. Losses on the investment office's "synthetic credit portfolio" had reached $2 billion so far this quarter, though he refused to give any meaningful details on how that had happened. Presumably, these are derivatives of some sort, but even that basic fact was too much for the bank to specify.

What Dimon lacked in information, he more than made up for in assigning blame -- to himself and JPMorgan employees. "There are many errors, sloppiness and bad judgment," he said, as JPMorgan's stock sank in after-hours trading. "These were egregious mistakes. They were self-inflicted." He called himself and his colleagues "stupid."

But there is more to it than that. Either Dimon misled the public about the gravity of the festering trades during his company's first-quarter earnings call last month. Or he didn't know what was happening inside the bowels of his own company. History tells us the latter is the norm for Wall Street bosses, though it's hard to say which is worse.

New Rule
Don't bother asking JPMorgan how it accumulated all these losses. That information is proprietary, as if the taxpayers who bailed out the bank in 2008 don't have any business knowing. Here's an idea for a new rule: If a too-big-to-fail bank can't disclose what its trading desk is doing for fear of blowing itself up, then the bank shouldn't be allowed to do it.

It's not often that a huge company calls an emergency teleconference on short notice to discuss an intra-quarter trading loss that's equivalent to only 1 percent of shareholder equity. So when a Deutsche Bank AG stock analyst named Matt O'Connor asked Dimon why the company had disclosed it at all, the answer was bound to be revealing.

"It could get worse, and it's going to go on for a little bit unfortunately," Dimon replied. The meaning was clear. Worse could mean disastrous.

[Jan Klimkowski]

Dimwit Dimon cannot even claim this is a "rogue trade", because these transactions were authorized.

Dunce Dimon also does not understand the meaning of hedging risk.

Or more likely, he knows but realizes that the consequences of admitting that this was global capitalist business as usual is even more dire than coming over as a financially illiterate fool...

Guest Post: Does Jamie Dimon Even Know What Heging Risk Is?

Submitted by Tyler Durden on 05/11/2012 06:45 -0400

Submitted by John Azis of Azizonomics

Does Jamie Dimon Even Know What Heging Risk Is?

From Bloomberg:

J.P Morgan Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an "egregious" failure in a unit managing risks, jeopardizing Wall Street banks' efforts to loosen a federal ban on bets with their own money.

The firm's chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.

Having listened to the conference call (I was roaring with laughter), Jamie Dimon sounded very defensive especially about one detail: that the CIO's activities were solely in risk management, and that its bets were designed to hedge risk. Now, we all know very well that banks have been capable of turning "risk management" into a hugely risky business that was the whole problem with the mid-00s securitisation bubble, which made a sport out of packaging up bad debt and spreading it around balance sheets via shadow banking intermediation, thus turning a small localised risk (of mortgage default) into a huge systemic risk (of a default cascade).

But wait a minute? If you're hedging risk then the bets you make will be cancelled against your existing balance sheet. In other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. That is how hedging risk works. If the loss on your hedges is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging risk. You are speculating.

Dimon then stuck his foot in his mouth even more by claiming that the CIO was "managing fat tails." But you don't manage fat tails by making bets with tails so fat that a change in momentum produces a $2 billion loss. You manage tail risk by making lots and lots of small cheap high-payoff bets, which appears to be precisely the opposite of what the CIO and Bruno Iksil was doing:



The larger point, though, is I think we all know damn well what Jamie Dimon and Bruno Iksil were doing as Zero Hedge explained last month, they were using the CIO's risk management business as a cover to reopen the firm's proprietary trading activities in contravention of the current ban.

Personally, I have no idea why the authorities insist on this rule if J.P. Morgan want to persist with a hyper-fragile prop trading strategy that rather than hedging against tail risk actually magnifies risk, then there should be nothing to stop them from losing their money. After all, these goons would quickly learn to stop acting so incompetent without a government safety net there to coddle them.

The fact that Dimon is trying to cover the tracks and mislead regulators is egregious, but that's what we have come to expect from this den of vipers and thieves.

[Peter Lemkin]

[video=vimeo;41897361]http://vimeo.com/41897361[/video]

[Jan Klimkowski]

Ah, sniff sniff... smells like.... brown trouser time for the bankers.


Market Ticker's Denninger writes:

So My Speculation On JPM Was Correct?


I hate it when I'm right.

The other day I speculated on Capital Account that we still don't know where the rest of the losses that must be taken from the housing insanity really are. Back in the 2007 timeframe I ran a "back of the envelope" calculation and figured we had about $3 trillion in losses in the system from various housing-related insanities -- subprime, ALT-A, CDOs made out of them and other associated trash. The problem is that only about $1 trillion of losses have been pushed out into the open and disposed of, which means that the other $2 trillion is sitting around somewhere.

It appears that we found part of the "somewhere".

The unit at the centre of JPMorgan Chase's $2bn trading loss has built up positions totalling more than $100bn in asset-backed securities and structured products the complex, risky bonds at the centre of the financial crisis in 2008.

These holdings are in addition to those in credit derivatives which led to the losses and have mired the bank in regulatory investigations and criticism.

The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralised loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times.

So JP Morgan has been buying up the crap and then "insuring" it with big derivative positions -- and had that "hedge" go bad? That would explain a few things.

Oh, and the size of the "non-vanilla" portfolio there now? Over $150 billion, reportedly.

Just a $2 billion (now said to be $3 billion) loss eh? Oh now that's a rather interesting question isn't it? Exiting from that position is likely to be an amusing enterprise to watch the bank attempt, and the people on the other side of these trades are rather likely to see if they can hammer JPM some more on the way out the door.

The problem with derivatives is that not only do they come stuffed with plenty of leverage but for everyone who wins someone must lose, and vice-versa. Now that JP Morgan's "holdings" are becoming more-known and the market has turned on them the amusing part of the market "coming after you" begins.

We allow this sort of crap to go on without fitting people for striped jumpsuits and stainless steel bracelets in our so-called "too big to fails"...... why?

(Note: This is only "amusing" if you're watching from the sidelines with a bag of popcorn. If you're dumb enough to set yourself up for such an event it's rather more like scrounging through an old warehouse, getting lost in the twisty little mazes made up of old boxes and crates, then realizing that Freddy Krueger and Eddie Scissorhands are stalking you )