London's Biggest Whale - JPMorgan Trader Iksil... Fuels Debate

[berkshiremystery]

London's Biggest Whale

 

Here's an interesting article about a secretive trader named Bruno Iksil. He works at JP Morgan's London branch in the banks chief investment office. Iksil's outsized bets in credit derivatives are drawing attention to a little-known JPM division that invests the company’s reserves and fueling a debate. He has a staff of 400 traders from Wall Street, who help oversee $350 billion in investments.

 

 

JPMorgan Trader Iksil Fuels Prop-Trading Debate With Bets

http://www.bloomberg.com/news/2012-04-09/jpmorgan-trader-iksil-fuels-prop-trading-debate-with-bets.html

 

 

[berkshiremystery]

Some new articles about Bruno Iksil. He has outsized bets in the credit-derivatives markets,... one of which they say may be as large as $100 billion.

 

JPMorgan’s London Whale Could Use New Nickname

http://www.bloomberg.com/news/2012-04-12/jpmorgan-s-london-whale-could-use-new-nickname.html

 

 

J.P.Morgan: A London Whale ? He's more of a Shrubbery?

http://blogs.wsj.com/deals/2012/04/13/j-p-morgan-a-london-whale-hes-more-of-a-shrubbery/

[sdev]

I actually believed JPM that it was just a hedge against their portfolio - never trust a bank!

[Parsad]

I think any banker arguing against the Volcker rule is just defending their book.  There should be a clear separation between banks and trading.  This just goes to prove it...that no matter how much a CEO knows, they don't know everything, and there is a real need for a barrier to risk that could take down a leveraged institution and others around it.  Cheers!

[Hielko]

http://ftalphaville.ft.com/blog/2012/05/10/995211/jpmorgan-whale-harpooned/

[Grenville]

From the 10Q

 

In Corporate, within the Corporate/Private Equity segment, net income (excluding Private Equity results and litigation expense) for the second quarter is currently estimated to be a loss of approximately $800 million. (Prior guidance for Corporate quarterly net income (excluding Private Equity results, litigation expense and nonrecurring significant items) was approximately $200 million.) Actual second quarter results could be substantially different from the current estimate and will depend on market levels and portfolio actions related to investments held by the Chief Investment Office (CIO), as well as other activities in Corporate during the remainder of the quarter.

Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO's synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO's AFS securities portfolio. As of March 31, 2012, the value of CIO's total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.

The Firm is currently repositioning CIO's synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm's overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.

 

I agree it will be an interesting day tomorrow.

[moore_capital54]

It was the Bloomberg Expose that caused this. The hedge funds on the other side came together and leaked the story, when it came out Bruno was prevented from short-selling CDS ad-infinitum which led the CDS to rise, and as a result JPM's position collapsed.

 

I agree that banks shouldn't be allowed to do this stuff. I am very disappointed in Dimon who just a few weeks ago spoke out against the Volcker Rule and/or its ramifications for competition globally.

 

The good news is that I bought BAC @ 7.49 after hours.

[Grenville]

It was the Bloomberg Expose that caused this. The hedge funds on the other side came together and leaked the story, when it came out Bruno was prevented from short-selling CDS ad-infinitum which led the CDS to rise, and as a result JPM's position collapsed.

 

Do you mean he was trying to short the CDS he was already long?

 

Also, in terms of mechanics, the position can move mark to market, but no real cash changes hands outside of collateral postings until there is either a default in the index or they try to close out the contract?

[PlanMaestro]

The good news is that I bought BAC @ 7.49 after hours.

 

Ready to bat.

[Grenville]

Just listened to the call.

 

From what I understand the synthetic credit position started out as a way to hedge the tail risk of the credit environment getting really bad, then over time they began to undo the hedge with a different strategy and that's where things went bad.

 

It's also funny that at one point someone ask Jamie Dimon if there were signs that he should have been following in Q1 when problems started to show up. He mentioned he should have paid more attention to trading losses and read the newspaper. I'm just guessing he's referring to all the commotion with the "London Whale".

 

Interesting times.

 

[ERICOPOLY]

I think any banker arguing against the Volcker rule is just defending their book.  There should be a clear separation between banks and trading.  This just goes to prove it...that no matter how much a CEO knows, they don't know everything, and there is a real need for a barrier to risk that could take down a leveraged institution and others around it.  Cheers!

 

WSJ reports that Dimon said: "This trade doesn't violate the Volcker rule, but it violates the Dimon principle."

 

So what we need is something tougher than Volcker, we need the Dimon principle  :D

 

[Rabbitisrich]

Just listened to the call.

 

From what I understand the synthetic credit position started out as a way to hedge the tail risk of the credit environment getting really bad, then over time they began to undo the hedge with a different strategy and that's where things went bad.

 

It's also funny that at one point someone ask Jamie Dimon if there were signs that he should have been following in Q1 when problems started to show up. He mentioned he should have paid more attention to trading losses and read the newspaper. I'm just guessing he's referring to all the commotion with the "London Whale".

 

Interesting times.

 

I haven't heard the call but a Felix Salmon post referred to a trade on CDS spreads adjusting towards the spreads of the underlying issues. So they go long the bonds by shorting the CDS, but the change in CDS spreads outpaced the bonds'. So if I read Salmon correctly, and he interpreted Dimon rightly, then the hedge was meant to protect JPM from the risk of some credit environment improving.

[Rabbitisrich]

Whoa, this VAR comment is pretty interesting. I'm surprised Dimon didn't get pressed more on the issue. Investors need to know whether new VAR model was a simple mistake in construction, or whether perverse incentives interfered with its selection.

[racemize]

Whoa, this VAR comment is pretty interesting. I'm surprised Dimon didn't get pressed more on the issue. Investors need to know whether new VAR model was a simple mistake in construction, or whether perverse incentives interfered with its selection.

 

Yeah, I thought so too, that being sad, the var model hasn't made a ton of sense to me in general--it seems to only pay attention to recent trends rather than serious possible risk.

[S2S]

It was the Bloomberg Expose that caused this. The hedge funds on the other side came together and leaked the story, when it came out Bruno was prevented from short-selling CDS ad-infinitum which led the CDS to rise, and as a result JPM's position collapsed.

 

Agreed.

[Uccmal]

I managed to buy some JPM common and 2014 - 35 s at the very bottom this morning.

 

I am working on the assumption that Dimon will want to get this behind him as fast as possible, and that risk profiles will be tightened up.  Market cap was off > 10 Billion, on a 2 b + loss.  It was already at a discount before this hit. 

[FCharlie]

I managed to buy some JPM common and 2014 - 35 s at the very bottom this morning.

 

I am working on the assumption that Dimon will want to get this behind him as fast as possible, and that risk profiles will be tightened up.  Market cap was off > 10 Billion, on a 2 b + loss.  It was already at a discount before this hit.

 

I agree. I bought more JPM this morning as well.

 

Jamie also said that with this disclosure the company could be in the market repurchasing stock as soon as today. Remember in the annual letter he boldly said the closer they got to tangible book value the more aggressive they'd be with the buyback. One would have to assume they'd be perfectly willing to repurchase 7.5% of the company right here. I want to buy alongside them, so I did.

[Grenville]

I was just looking at JPM credit derivative notional exposure in the last 10Q:

 

Their net credit protection sold is 206.6 bln versus 116.8bln last quarter. The overall portfolio of sold CDS is 3.1 trillion versus 2.9 trillion last quarter.

 

 

[treasurehunt]

I managed to buy some JPM common and 2014 - 35 s at the very bottom this morning.

 

I am working on the assumption that Dimon will want to get this behind him as fast as possible, and that risk profiles will be tightened up.  Market cap was off > 10 Billion, on a 2 b + loss.  It was already at a discount before this hit.

 

Did you consider buying the JPM treasury warrants? They are currently trading at just over $10 with a strike price of $42.42 and almost six and a half years till expiry. I think the warrants should provide a much better return than the stock and 6.5 years is probably enough time for price to catch up with intrinsic value.

 

I bought some warrants this morning.

[jberkshire01]

It’s hard not to think of Buffett’s ‘financial weapons of mass destruction’ quote when you see numbers like this:

 

NOTIONAL AMOUNT OF DERIVATIVE CONTRACTS

 

JPMORGAN CHASE $70.2 trillion

CITIBANK $52.1 trillion

BANK OF AMERICA $50.1 trillion

GOLDMAN SACHS BANK $44.2 trillion

 

Source: http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdf

 

Whether at JP Morgan or elsewhere, it's hard to believe there won't be a few more large cockroaches still hidden in the kitchen that may find there way into the open over the next couple of years.

[Grenville]

It’s hard not to think of Buffett’s ‘financial weapons of mass destruction’ quote when you see numbers like this:

 

NOTIONAL AMOUNT OF DERIVATIVE CONTRACTS

 

JPMORGAN CHASE $70.2 trillion

CITIBANK $52.1 trillion

BANK OF AMERICA $50.1 trillion

GOLDMAN SACHS BANK $44.2 trillion

 

Source: http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdf

 

Whether at JP Morgan or elsewhere, it's hard to believe there won't be a few more large cockroaches still hidden in the kitchen that may find there way into the open over the next couple of years.

 

I agree the notional amounts are large, but I think you have to separate the types of contracts making up that exposure. A vast majority are interest rate swaps which are tied to large notional amounts, but the amount of cash transferred is an interest rate times the notional amount. 

 

It would be nice if the system didn't have as many derivatives, but it seems like derivatives are here to stay and it's something you have to understand and get comfortable with if you want to invest in the banking system. 

[Grenville]

If the CDX Markit index for Investment grade CDS (Markit CDX.NA.IG) is tied to the JPM trades, its down 5.7% today.

 

The quote is on their home page:

http://www.markit.com/en/

[Grenville]

More detail on the trade and background on when things started. Fascinating.

 

"In JPMorgan Chase Trading Bet, Its Confidence Yields to Loss"

 

http://dealbook.nytimes.com/2012/05/11/in-jpmorgan-chase-trading-bet-its-confidence-yields-to-loss/?hp

[berkshiremystery]

Some new debate about the London Whale.

 

Exactly Whose Money Did the London Whale Lose?

Sep. 24, 2012 - Bloomberg

by William D. Cohan

 

http://www.bloomberg.com/news/2012-09-23/exactly-whose-money-did-the-london-whale-lose-.html?cmpid=yhoo.view

 

 

Whose $6 billion did JPMorgan Chase & Co. (JPM) lose during the now-infamous London Whale debacle? Was it depositors’ money or shareholders’ money? Or was no money lost at all? And was the whole thing the very “tempest in a teapot” that Chief Executive Officer Jamie Dimon originally called it?

 

Evangelisti said depositors lost nothing and, in fact, the CIO account has an embedded $10 billion unrealized gain. This leaves me feeling a little like the casino executive in “Ocean’s Eleven” who, upon realizing the casino’s vault had just been robbed of close to $163 million, incredulously asks Andy Garcia’s casino-owner character: “I don’t understand. What happened to all that money?”