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Is JP Morgan Fronting for the Fed?

Posted by Larry Doyle on April 13, 2012 9:09 AM |

UPDATE: This commentary written in mid-April 2012 should be read in conjunction with the following:

May 14th Review: Bloomberg Bombshells re: JP Morgan $2B Loss

May 12th review: $2B Loss? What Went Wrong at JP Morgan? 

May 11th review: JP Morgan Whale: “Thar She Blows”


Reports are swirling around Wall Street and the global markets about massive credit bets on the books at JP Morgan.

A JP Morgan trader in London, Bruno Iksil, has been nicknamed ‘the whale’. Iksil reports ultimately to Achilles Macris, JPM’s chief investment officer in Europe and Asia. Bloomberg had an interesting discussion this morning about Iksil, Macris, JPM, and these positions. Let’s watch and learn…

What do people think about JPM’s explosive growth in these credit exposures? Merely taking advantage of a Fed which is clearly making sure markets remain propped? Taking advantage of the oligopoly that currently defines Wall Street?

Might people believe that the strongest bank in the world is actually working in concert with, if not actually fronting for, the Federal Reserve to keep credit spreads down in an attempt to spur growth in the economy?

Seems like a very logical assessment to me, and one fully consistent with markets that are heavily managed if not outright manipulated. From JP Morgan’s standpoint, I guess “It’s good to be the king!”

What do others think?

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • LD

    From Zero Hedge,

    “What Bernanke is to the Treasury market, Iksil is to the derivatives market,” Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP in Los Angeles, where she helps oversee $32 billion, said in a telephone interview.

  • fred

    Dealing with the devil.

    As the Fed moves from crisis to crisis as a condition of below market interest rate policy, just what do they expect primary dealers to do with all the liquidity they’re injecting into the banking system, make loans? No way, much too risky, bad economy you know!

    Jamie aka ‘the wunderkid’ had a brilliant idea, why not ‘hedge’ risk exposure in offshore locations under the direction of the CIO, the perfect alternative to prop trading in NYC and it should avoid the red tape of the Volker/Sarbanes rules.

    Not to worry, if this doesn’t pass the smell test, next quarter the ‘prop desk’ can always be moved to Shanghai and do some ‘residential hedging’ under the direction of the CFO.

  • Obsvr-1

    LD — can you either shed light on or do you have a good reference to data that shows how much money is being made (transferred) to the Primary Dealers (PD) as a result of the QE regime.

    Primary Dealers borrow funds at the FFR (.25%) to purchase US Treasuries, only to sell back to the FED to support the QE process. Since this is not a buy bonds to hold to maturity business, but to the contrary buy bonds from the UST to sell to the FED; in aggregate how much have the PD spent on Bonds and how much have they made selling the Bonds — Net wealth transfer from the USGov’t to the PDs ??

    Even if they make a scant 10 basis points, it results in $100M for every $100B, and the FED is operating in the $T’s for these QE OPS.

  • LD

    Great question. To be fair the purchase and sale of the securities are not simultaneous transactions where the banks merely clip 10 basis points or even a little bit more.

    The real value to the banks is knowing in advance that the Fed will be in the market buying. That information is invaluable because it allows the banks to position themselves for the buyer. With that sort of advance knowledge the banks still do run the risk that for whatever reason the market might sell off prior to the Fed’s purchase but all other things being equal, the street, that is the banks, will keep the market propped up so that they can sell bonds to the Fed at a nice profit, often the high price of the day.

    The real key is the advance knowledge.

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