£4.4 billion?!

Wow, look what I've just picked up on the Tube station!

Although this estimate might not be from the most reputable source, Bloomberg and FT are also talking about a much bigger number than Dimon announced.

If confirmed at this value, it must surely be one of the biggest trading losses ever... Do you guys think it's going to hasten the implementation of prop trading ban in Europe (is this even possible?)? As they will definitely have a hard time explaining that this was just a hedge!

Some recent links...

Bank’s Loss May Widen

ft.com/blog/2012/05/21/1008231/oh-so-now-its-a-5bn-loss/">Now it’s a $5bn loss?

 

Last info I got indicated the trades were still open, so yeah, this is possible. The original $2BB was a paper loss. The interesting part of this is that there is still (theoretically) a chance they can turn this around, but I don't know anything beyond that....

Get busy living
 

Yeah, that's like 1 quarter of earnings wiped out...

What I still don't understand is how stuff like that happens. How is it even possible that 1 trader is able to have a position of 100 billion dollars? I don't think it was cash, right? So what was the leverage like? Where is the risk department?

"Every man should lose a battle in his youth, so he does not lose a war when he is old"
 

The problem with areas like the CIO and the "Management Book" is that it often just bypasses the usual risk management processes. For normal trading areas there will be countless people reporting, analysing and stress testing the positions that the desks are taking. Stressing all sorts of scenarios (steepeners, flatteners, twists, flight to quality and a thousand other scenarios). I guarantee that all that was in place for these positions was basic VaR and DV01 reporting.

How anybody was allowed to take positions of that size though is unbelievable.

 
Best Response
FoSho:
The problem with areas like the CIO and the "Management Book" is that it often just bypasses the usual risk management processes. For normal trading areas there will be countless people reporting, analysing and stress testing the positions that the desks are taking. Stressing all sorts of scenarios (steepeners, flatteners, twists, flight to quality and a thousand other scenarios). I guarantee that all that was in place for these positions was basic VaR and DV01 reporting.

How anybody was allowed to take positions of that size though is unbelievable.

This.

And remember that these guys were actually moving the market with their trades. As in total domination. The leverage is insane. I don't think there's any way Jamie survives this, and there's a chance JPM has damaged the market on the whole:

http://www.breitbart.com/Big-Government/2012/05/16/jp-morgan-fiasco-mea…

 
Bravo:
Dimon said he is no rush to unwind their position.
Fun part about this is that it could swing the other way. It's unlikely, but possible. Personally, I'd get a laugh out of this if they somehow came out ahead..
trazer985:
Is this only happening at JP? or do you think we've got some hidden gems coming out of all banks?
FoSho:
How anybody was allowed to take positions of that size though is unbelievable.
Would someone who knows about these things care to comment?
Get busy living
 
UFOinsider:
FoSho:
How anybody was allowed to take positions of that size though is unbelievable.
Would someone who knows about these things care to comment?

That desk has generated over a quarter of JPM income in a year before. Why would you not allow for them to roll the dice they've done it for years? It is just money and losing is part of the game. Imo and only my opinion as long as JPM haven't cooked their books in other products causing for multiple credit downgrades (downgrades = collateral calls) they will survive this blip on the screen. They have enough money behind them but ANYTHING can happen.

Please don't make me talk to you like an asshole...
 

I am sure this is a silly question, but what forced them to disclose the loss in the first place? Was that because of the recent shareholders meeting?

"Every man should lose a battle in his youth, so he does not lose a war when he is old"
 
HumPiranha88:
Anyone know how much time they have before the shit they're holding matures?
Yeah when will the shit hit the fan, wanna short JPM
Simplicity is the highest form of sophistication ~ Leonardo da Vinci
 

Where was the risk department? Lyme's Disease put her out of the picture (lulz). At least this shuts up those Lehman's Sisters commentators.

Is this only happening at JP? or do you think we've got some hidden gems coming out of all banks?

(the article said he was betting on the creditworthiness of corporate america, i'm guessing thats bonds of big american corps).

T

 

UFO - my question was a bit rhetorical. The reason they would have been allowed to take positions this big is because thy just bypass all of the usual controls.

Ie. Head of CIO tells CEO it's a good idea, wheels out a couple of figures to back this up (like showing that it is a hedge for wider balance sheet positions) and nobody questions it.

Probably gets reported on an AFS basis as well so nobody high up sees the MtM volatility on it until month or quarter end.

 

I wouldn't call this a blip on the screen. I can't remember the article, but this "hedging strategy" is supposed to overlay the insane position JP Morgan has taken in European mortgage-derivatives since the crisis in order to find yield. Supposedly they now own around 45% of the market. Wish I could remember my source (not Zerohedge).

I'm not convinced the CIO has been doing anything smarter than what Howie Hubler and the boys were doing before the crisis. This will likely help swing the regulatory pendulum a whole lot more.

 
GoodBread:
I wouldn't call this a blip on the screen. I can't remember the article, but this "hedging strategy" is supposed to overlay the insane position JP Morgan has taken in European mortgage-derivatives since the crisis in order to find yield. Supposedly they now own around 45% of the market. Wish I could remember my source (not Zerohedge).

I'm not convinced the CIO has been doing anything smarter than what Howie Hubler and the boys were doing before the crisis. This will likely help swing the regulatory pendulum a whole lot more.

Might be from the FT Whale Watching Tour. Very informative collection of articles (10 as of today), I recommend it to everyone. You can find the first one here (http://ftalphaville.ft.com/blog/2012/04/18/965141/thar-she-blows/) and the rest are linked in the bottom of the page. They are estimating a $5Bn loss.

 

@Groodbread

I do not know JPM Fixed Income positions but if they do own 45% of the European MD market and it goes sour for them rather quickly that follows what I have stated. They've cooked their books in other products and as a firm will receive credit downgrades that will lead to collateral calls (possibly major ones). If this is the case things should get interesting fast. We will find out how much of a "hedge" this really was after that scenario. Greece staying or leaving the euro should play a part depending on which side of the coin JPM is on. If Greece leaves write downs are happening all across the board in Europe. Once you start marking to market.... good grief. Fire works.

The other scenario is this incident is confined to the CIO units bogus CDX.IG/CDX.HY spread and they live to fight another day. Well, sort of. Regulation will apply pressure and attempt to drop the hammer.

...At the end of the day nothing I stated is a fact. Just two possible scenarios out of many that can be quantified.

Please don't make me talk to you like an asshole...
 

Looking like it could be up to $8 billion. Shit:

http://www.zerohedge.com/news/8bn-loss-or-was-jpmorgan-unhedged-long-an…

tl;dr version:

So, in summary, it appears that the CDS data confirms what we suspected.

A large (~$120bn) tail-risk tranche credit hedge was placed. The hedging of that hedge became very onerous but surprisingly profitable as markets rallied day after day with no give-back. This led to a greedy trader lifting some of the original tranche (and the HY short side) and leaving himself much more naked long to the market into LTRO2 - which marked the top. Losses escalated through April (~$2.5bn or so). Dimon went public (with some of the details). Last week, the rest of the tranche was dumped (we suspect) at a large cost (perhaps ~$5.5bn) leaving, we suspect... A potential ~$8bn loss and a heavy IG9 long credit position hedged (with major basis risk - difference in dynamics between the legs of the trade and the hedge) by various other liquid positions including shorts in HYG, JNK, IG18, and HY18 (and we would suspect equity/financials too).

 

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