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JP Morgan: 9B Loss? Is That It? A Hedge? Really?

Posted by Larry Doyle on June 28, 2012 7:34 AM |

On May 10th, JP Morgan CEO announced that the bank faced a $2 billion loss on a hedge that had gone awry in its Chief Investment Office.

Many analysts and commentators discounted the fact that for an institution of JP Morgan’s size a surprising $2 billion loss, while significant, was not overly significant.

Perhaps they were right. If a $2 billion loss is insignificant, then what about an $8-9 billion loss. Significant yet? 

In early May, Dimon had expressed a degree of caution that the loss could grow. Did anybody project that it may have more than quadrupled? Bloomberg reports as much in writing, JP Morgan Slips on Report Trading Loss Widening to $9 Billion:

JPMorgan Chase & Co. (JPM) fell almost 4 percent in European trading after the New York Times (NYT) reported the lender’s losses from credit derivatives may total as much as $9 billion, exceeding the firm’s initial estimate.

JPMorgan Chief Executive Officer Jamie Dimon said on May 10 the bank lost more than $2 billion on bets in credit markets taken by its chief investment office in London and that the loss could increase by as much as $1 billion this quarter. Dimon, 56, has said JPMorgan is in no rush to unwind the trades, even if adverse market moves produce bigger losses in the short term.

The firm’s losses have increased in recent weeks as JPMorgan sought to exit its holdings, the New York Times reported today, citing unidentified former traders and executives at the bank. The company has already closed out more than half of its positions, the newspaper said.

Clearly, the price of liquidity for JP Morgan in unwinding a highly publicized position was not cheap. That said, so many questions continue to scream out for answers.

Is it over yet? What were the marks on the position back in early May? What are the current marks? How much of this very troubling position has truly been unwound? Was Mr. Dimon properly representing the size of the loss at that point in time? Does Dimon still have the balls to call this disaster a “hedge?”

Given the opacity in the derivatives sector of the market, we have no real way of fully knowing how much exposure JP Morgan has unwound. That said, given the quoted levels on the derivatives index in question, the CDX- NA IG 9, it seems implausible that Dimon was properly representing the size of the loss back in early May.

The FT/Alphaville provides fabulous insights into the intrigue surrounding the “thar she blows” of JP Morgan’s “London Whale.” If JP Morgan’s loss quadrupled, then the index likely continued to move sharply against JP Morgan and that reality would be reflected in its valuation. Or maybe not. The chart below highlights how the valuation of this index blew out during the month of April, but has since traded in a relatively narrow range:

Again, many reports indicate JP Morgan has now significantly unwound its position. The simple fact is we have no real way of fully knowing. The writer at the FT Alphaville seriously questions the premise that JP Morgan is anywhere close to being out of this fiasco.

The amount of risk on the CDX.NA.IG.9, on the other hand, doubled since the start of the year. As FT Alphaville has demonstrated before, this increase was unprecedented. We now know that this is very likely down to the portfolio of JPMorgan’s CIO and all of those who chased said Whale, taking advantage of price distortions in its wake.

But did you notice how the net notional amount didn’t drop by a huge amount last week? It’s been declining steadily over the last month, which implies some unwinding by those on either side of the trade, but it’s nothing like the jump down that we’d been expecting, given the graph that we started this post with.

So many questions. So few real answers. Neither the morning news shows nor the major media outlets seem to want to draw real attention to this reported quadrupled loss.

I am compelled to repeat my question posed back in early May: “How do you know if/when Jamie Dimon is not telling the truth?” Did somebody say, “When his lips move?”

Such is life in a world of “too big to fail” banks and captured regulators.

Glass-Steagall, anybody?

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.



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