Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

JPMorgan Busted Bet Was No Chance Encounter

Companies / Banking Stocks May 15, 2012 - 08:00 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleShah Gilani writes: This weekend I was strolling by JPMorgan Chase's (NYSE: JPM) Park Avenue office building in Manhattan.

It was 11:40 am, and I was returning from a long walk from my midtown hotel down to Chelsea (it was definitely "a Chelsea morning" in NYC... thank you Joni Mitchell).


I hadn't planned to walk by their office building; I didn't even know where it was.

But there I was, rounding 48th Street on Park Avenue, when I saw the JPM sign. I thought, how ironic, I'm in New York, appearing on FOX News to talk about the debacle at JPM, and here I am serendipitously walking by their office building.

But it gets even better.

There was no one on the street, which is pretty unusual for New York. I was looking at the barricades in front of the building and imagining that they must have needed them on Friday, when the press and public must have been surrounding the building on news that the bank had just admitted losing $2 billion (actually it's $2.3 billion and counting) on a hedge position.

I was thinking, poor CEO Jamie Dimon.

And how ironic; he's been publically deriding the Volcker Rule as being stupid and unnecessary, and now he's the tempest in the teapot (which is what he called rumors about his London office's rumored losses)...

When who else should get out of a shiny GMC chauffeured "black car" but Jamie Dimon.

Caption: Amazing freaky impossible as it was, I as just standing outside JPMorgan on Park yesterday, when out of his chauffeured black GMC ride steps Jamie Dimon in an untucked polo shirt and tennis shoes. I smiled at him and thought, "What are the chances of that happening?"

He was wearing a maroon-and-blue stripped polo shirt (untucked), blue jeans, white tennis shoes, and a long face.

We were the only two people on the sidewalk, so needless to say, we made eye contact. I smiled at him and was so tempted to ask him sarcastically, "Jamie, why the long face?" But, of course, I didn't. I simply smiled at him, and he looked through me, as if I wasn't there, or was someone from the press who he wanted to make disappear.

I was really struck by this chance encounter. And I thought, what are the chances of that happening?

Then it hit me. Chances were pretty good. After all, where else would he be on this Saturday but going into the office to deal with the mess his bank was in?

And that's when it really hit me. What were the chances that his bank would have lost more than $2 billion (and counting, did I say that earlier?) on a "hedge" position?

Oh, the irony of it all. Chances aren't always just chances. Sometimes they are meant to be... because some things aren't by chance; some things actually are what they are.

So, am I surprised that Jamie's little bank lost $2.3 billion (and counting, did I say that?) on a hedge position? NO. It's hubris come home to roost. Pride before the fall... and all that.

Here's what you don't know.

(And am I guessing here? Yes, but, not really guessing guessing. I kind of know, because I've kind of been there and done that. No, I've never lost $2 billion, or even $1 billion. But I did run the hedging operations for one of Britain's largest banks... many moons ago. So, I know a little about what goes on at big banks.)

Trust me - that's probably what the head trader told the risk department at JPM when he put on the Big Trade - the hedge position that the bank put on wasn't a hedge at all.

It was a bet designed to make money that was designed to look like a hedge. Which only was ever going to be called a "hedge" if they lost money on it.

Otherwise, no one would have noticed that they made a ton of money on the position. It would have been buried in their financials as some income thing from something that was what they do that makes them oh so good at what they do. Did I say hubris?

Oh, I keep digressing. I'm sorry.

Here's the deal...

Here's What Happened at JPMorgan (NYSE: JPM)
The idiots at the bank wanted to hedge against European credit exposure that they had.

They are idiots because the money that's shepherded by the Chief Investment Office (some $379 billion, yeah, that number is right) is money that the bank has and hasn't lent out, or technically is "available" to play with.

And instead of parking it in U.S. government bonds (Citi has $293 billion of the same float and has 87% of it parked in "governments"), they parked a lot of it in Europe's crappy credit markets.

Something about looking to pick up some yield, they'll eventually come out and say. No, never mind, they'll never admit that.

So, they get nervous and tell the CIO to hedge their European credit exposure.

That's not stupid. What is stupid is that they put on a giant trade in an illiquid part of the markets (derivative spreads... it will come out, I'm sure. They were playing the spread between junkie credits and good credits) with, guess who? Hedge funds and a few banks.

Why is that stupid? Because here's how trading really works.

If I know your position, and you have a huge position on, and I'm on the other side of it along with a bunch of my friends (after all, we're all friends trying to make money on Muppets, and this time the bank itself was the Muppet puppet), I'm going to do what I have to do to get you to cry "uncle."

I'm going to mess with your position.

I know what it is. I know it's illiquid. I know I'm not going to let you out of it, because I'm on the other side of it and no one else wants to take your stupid, illiquid position off your hands.

Are you starting to get it?

The London Whale, Bruno Iksil, the head trader on this beauty of a trade, got into a position that he couldn't get out of, and the boys on the other end played him like a patsy.

I've done that before. It's fun... and very profitable.

JPM ain't done losing money on this trade. I'm guessing that it's going to cost them another billion or two to unwind this gem, maybe three. I am so laughing and so jealous that I'm not on the other side of their stupid trade.

This whole thing, the whole "chance" thing doesn't have anything to do with chance. Things happen for a reason.

As far as JPM losing a few billion, it's nickel and dime in the big picture of their earnings clout. Actually, I think the stock is close to a "buy" here. I'm thinking about taking on some JPM stock and adding to it, as it might drop another 10% to 20%.

But that's just me. I like my chances.

Source :http://moneymorning.com/2012/05/15/jpmorgans-nyse-jpm-busted-bet-was-no-chance-encounter/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in