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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.



  • Obsvr-1

    ooops… what’s a few $B amongst TBTF.

    We live in the new world of hearing $T’s being thrown around, now it seems that loosing $B’s is pocket change.

    Time is now to break up the TBTF, follow the Richard Fisher recommendation!

    Break Up the Banks! Dallas Fed President Calls for the End of “Too Big to Fail”

  • fred


    Correct me if I’m wrong or you disagree.

    Post Glass-Steagall repeal, when the Fed increases the money supply by buying Treasuries (MBS, or Sovereign Debt), what do they expect primary dealers to do with the cash?

    Before Glass-Steagall repeal, the options available to primary dealers were essentially limited to making loans or building reserves. Post Glass-Steagall, primary dealers can now invest cash balances in almost anything they want to, given acceptible risk levels.

    Hedging has now become synonomous with arbitrage and given the level of arbitrage opportunities available utilizing HFT, why would a bank make a loan or build reserves? (that is of course, unless it had to).

    The recurring problem to all hedging/arbitrage strategy, investment returns are not always normally distributed so, at times, even perfect arbitrage/hedges can and do blowout.

    Just ask Long Term Capital, MF Global or now, added to the list, JPM.

    Two things have to happen:

    1. Primary Dealers should be limited as to how they “invest” Fed Cash.

    2. All financial entities 1) with federally insured deposits or 2) have been classified by regulators as “too big to fail” should be bound by Glass-Steagall.

  • LD


    Given the fact that money is fungible it is hard to pinpoint what exactly the banks are doing with the funds.

    The Fed looks at the overall level of money supply in the system and then establishes capital levels which banks need to maintain for different business activities. These capital levels are obviously very important in determining how much capital is allocated to selected businesses.

    While the Fed obviously has an enormous impact on the overall level of money in the system they are not able to control the velocity of that money.

    There are a whole host of issues to address. Glass-Steagall has some very compelling and appealing characteristics. Easier said than done though especially at this point in time. Why is that? There are only a small number of banks (oligopoly) and if those are further cordoned off by implementation of G-S, then the limited liquidity in the marketplace may actually decline even further.

    What is the answer? IMO, a scaling in of G-S over some defined period of time so the banks and the markets can adjust accordingly.

  • Bill

    These rydex currency etfs,e. g. FXE, FXC, etc., carry in addition to the obvious risk of currency movement the risk that JPM will go under, in which case the holders become unsecured creditors of JPM, subordinated to the claims of US unsecured creditors.

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