Bruno Iksil, JPMorgan and the Real Conflict with Credit Default Swaps

rcwhalen's picture



We all have been watching the media fuss over the JPMorganChase (JPM) trader Bruno Iksil.  Bloomberg News sums its up: “ Iksil’s outsized bets in credit derivatives are drawing attention to a little-known division that invests the company’s reserves and fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money.”


For a number of months now, I have been listening to members of the Big Media wring their hands over the idea of bank holding companies using taxpayer-assured funds to trade OTC derivatives.  But is this really the key problem with banks and CDS?  IMHO, no. 


Buried deep in the Bloomberg News story is a comment that indicates Iksil was betting American Airlines (AMR) would file while other hedge funds bet the other way.  He won and made huge profits for JPM.  “Surprise, surprise,” to quote Gomer Pyle.


BUT WE ALL KNOW THAT BY ITS CONTROL OF SYNDICATED LOANS, JPM CONTROLS WHEN ANY MAJOR ENTITY FILES CH. 11 (by controlling when the debtor-in-possession financing syndication will close).  Thus the real question regarding Iksil and all large banks that trade CDS is whether the lending side of the house is speaking to the trading side of the house.  My guess is “yes” based on observation of many default events and also conversations with people inside the largest banks.


I respect JPM CEO Jamie Dimon.  He is a great operator and wouldn't likely know if Iskil was using back-door contacts to learn about (and even influence) when the DIP syndication gets done.  But that timing is precisely how the large dealer banks that issue all the CDS effectively control when an entity files bankruptcy. 


From the start of the CDS market, we saw this as a phenomenon where the bonds of a cash-short debtor fall as CDS spreads rise when "shorts" take a run at an entity by bidding up the CDS values when the short, naked, bonds by buying CDS.  Then "magically" the bond market "opens" and the debtor's bonds skyrocket in value just before the Ch. 11 occurs.  Think GM and Delphi, for those of you with short memories. 


The bond rally before the CH 11 is a "standard" pattern seen many times. As CDS rise with increasing shorts, the debtor is increasingly barred from selling new debt to avoid a crisis because the big banks "naturally" price new debt based on the implied price shown by rising CDS values for that debtor.  


Then, as a bankruptcy filing is being negotiated, "strangely" the timing of filing relates to the expiration of some batch of CDS contrcts (when major banks are "off the hook"). As the DIP financing is syndicated, there's suddenly a surge in the value of the debtor's bonds as hedge funds that are "naked" (lacking bonds to deliver with their CDSs on default) try like heck to buy bonds (in order to match them to the "naked" CDSs which results in 100% recovery).


As readers of ZH may recall, in the last week before Delphi filed, its bonds jumped 25% in value as naked hedge funds sought to cover their CDS contracts.  Does that help jog your collective memories?


People like Iksil are not dumb and one would have to be REALLY dumb to do what he does without seeing the pattern between an approaching default event and the movement of bond prices.  Obviously federal regulators have no idea, but the Iksil matter is a near-perfect example of why we need to limit CDS.  How?  To (i) demonstrable "matching" (to back owned risk positions), (ii) time for unwinding the CDS after selling the matched position and (iii) some reasonable inventory level for those that deal in the underlying bonds.  That is, if you don’t own the underlying, no buying of CDS, period.   


So please, my dear friends in the Big Media, it is time to get a collective clue.  The real problem with CDS trading by large banks such as JPM is not the speculative positions taken by traders like Bruno Iksil, but instead the vast conflict of interest between the lending side of the house and the trading side, whether the trader is on the arb desk or, in the case of Iksil, working for the CIO trading for the bank’s treasury.  Keep in mind that all of Iksil’s colleagues in New York who traded for the JPM treasury have been fired due to the Volcker Rule.  More on that in a future rant.


What is the answer?  We need to focus on the Volcker Rule in Dodd-Frank and take the process the next, logical step, namely to separate completely the lending side of the house from the trading side of the house.  We can do this through a complete, physical separation of the two business units.  Or you could simply enact a law that prevents banks from trading any security or derivative where the bank has a lending relationship with the issuer.  


The latter course is draconian, but only recognizes what we all used to know instinctively before the creation of the CDS market; namely that lenders have a duty of care to borrowers and should not take any action that would prejudice the interests of their customers.  How’s that for an old fashioned idea?  I’ll bet my friend Chairman Volcker would agree. 


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Wed, 04/11/2012 - 23:28 | 2336742 cranky-old-geezer
cranky-old-geezer's picture



I'm short the "revolution", "taking America back", and "restoring constitutional government".

I'm long communism, currency collapse, and America collapse.

Anyone wana take the other side of those bets?

Tue, 05/15/2012 - 14:14 | 2428215 malikai
malikai's picture

I'm short communism. But only because I've offset it with a big Fascism Nov12 call.

Wed, 04/11/2012 - 20:36 | 2336517 skepticCarl
skepticCarl's picture



There once was a trader named Bruno

Who said "CDS's are something I do know

Derivatives are fine

and Swaps are divine

But being inside is Numero Uno"

Wed, 04/11/2012 - 20:19 | 2336482 Bluntly Put
Bluntly Put's picture

I'm not sure but I think the Glass-Steagall Act helped prevent these sorts of "conflicts of interest".


Wed, 04/11/2012 - 20:05 | 2336456 CoolBeans
CoolBeans's picture

I respect JPM CEO Jamie Dimon...

Seriously?  Then you must worship Satan..,Dimon is Satan's right-hand man. 

I refused to read on...anyone who can put that in writing gets none of my time.

Thu, 04/12/2012 - 03:09 | 2337005 jmk
jmk's picture

I agree. Dimon is Mackie Messer.

Wed, 04/11/2012 - 19:57 | 2336433 Peter Pan
Peter Pan's picture

How much does Bruno get paid for doing God's work?

Wed, 04/11/2012 - 19:54 | 2336426 gookempucky
gookempucky's picture

I respect JPM CEO Jamie Dimon.

Ya I got dimons respect card----- 12" alabama black snake shoved up his ass until he blows white shit out his nose.

whalen your a stooge

Wed, 04/11/2012 - 19:45 | 2336394 jmcadg
jmcadg's picture

As stated above. Dimon deserves no respect. He is just scum. As anyone who had an MFG account would testify.

Wed, 04/11/2012 - 18:56 | 2336256 disabledvet
disabledvet's picture

You and Paul are drinkin' buddies? He never calls anymore. Ever since..."the incident" that gave him the limp...he's been distant...aloof even. I miss those late nights of Wild Turkey and Canasta....Alan, "going all in" as he always did. I always suspected him of cheating actually...

Wed, 04/11/2012 - 18:34 | 2336193 LawsofPhysics
LawsofPhysics's picture

"The real problem with CDS trading by large banks such as JPM is not the speculative positions taken by traders like Bruno Iksil, but instead the vast conflict of interest between the lending side of the house and the trading side, whether the trader is on the arb desk or, in the case of Iksil, working for the CIO trading for the bank’s treasury. "

Precisely why banks should be just fucking banks.

and also why banks need to constant repeal laws that llow more criminal behavior or make past criminal behavior now legal.

Wed, 04/11/2012 - 18:16 | 2336148 Geoff-UK
Geoff-UK's picture

I hear you advocating a return to Glass-Steagall--but what I can't find in your article is how that increases profitability for JPM?

Sorry, but I don't see how a return of Glass-Steagall helps JPM *OR* their fully-owned subsidiary, the U.S. Congress. Thus, unlikely to happen.

Epic fail in your argument.

Wed, 04/11/2012 - 17:49 | 2336074 El Oregonian
El Oregonian's picture


Solution for oil shortage?

One name.

Bruno "The Whale" Iksil...


Harpoon the SOB and melt down his blubber for oil.


Oil output doubles.

Wed, 04/11/2012 - 17:57 | 2336100 Buck Johnson
Buck Johnson's picture

Iksil is becoming the Keiser Soze of CDS's and the soon to happen western banking implosion.

Wed, 04/11/2012 - 17:35 | 2336021 UP4Liberty
UP4Liberty's picture

Methinks you give Jamie Dimon too much slack...

Wed, 04/11/2012 - 18:47 | 2336228 Widowmaker
Widowmaker's picture

More like RC on his knees taking off Dimon's slacks.

This is bullshit, let failure fail instead of micromanaging Butters-bruno and his faggot friends.

Racketeering kills itself, it always does.

Wed, 04/11/2012 - 17:16 | 2335978 tony bonn
tony bonn's picture

" whether the lending side of the house is speaking to the trading side of the house.  My guess is “yes”...."

there may or may not be direct speaking but that doesn't mean that collusion is not occurring or that ways do not exist to leverage the information....

conflict of interest indeed is old news...this issue was reported some years ago when jpm (or ms) held a loan to one of the x-stan countries and forced a default because the cds payout was more profitable than the loan....

thus the conflict leads to lethal and evil behavior...the proposed solution is a reasonable start to curbing the use of weapons of mass financial destruction....

Wed, 04/11/2012 - 17:15 | 2335976 apberusdisvet
apberusdisvet's picture

JPMorgan is a domestic terrorist organization and as such falls under the new NDAA law.  All execs should be snatched and 1st renditioned to Somalia, tortured and then used as bitch meat in a max security prison.  After all what's good for the sheeple..........

Wed, 04/11/2012 - 20:07 | 2336459 CoolBeans
CoolBeans's picture


Wed, 04/11/2012 - 16:41 | 2335868 Dingleberry
Dingleberry's picture

I recently heard that these big banks that do prop trades cannot make money without fleecing their own customers in today's environment. Or they must manipulate markets. I understand that now.  This "whale"...MF Global...Goldman/Paulson RE deal, etc. etc. etc. 

Wed, 04/11/2012 - 16:33 | 2335841 NotApplicable
NotApplicable's picture

"I respect JPM CEO Jamie Dimon."

Ha ha ha ha ha ha ha ha...

*catches breath*

Ha ha ha ha ha ha ha ha...


Another one bites the dust.

Wed, 04/11/2012 - 17:07 | 2335948 rcwhalen
rcwhalen's picture

Dimon is the best large bank CEO.  Has avoided must of the pittfalls in RMBS, etc.  Call me when you are running a large cap public company.  

Wed, 04/11/2012 - 20:16 | 2336475 Narcolepzzzzzz
Narcolepzzzzzz's picture

"Dimon is the best large bank CEO"

Isn't that like being the world's tallest midget?

Wed, 04/11/2012 - 17:27 | 2336010 Cameli
Cameli's picture

Just give me a shot at it. Knowing that I'll never be prosecuted for any shady deeds I perpetrate or face possible imprisonment I guarantee you I will make a bundle.

Wed, 04/11/2012 - 17:24 | 2335999 AlaricBalth
AlaricBalth's picture

I am sure Mr. Dimon has no idea where the customer funds from MF Global may be.

Wed, 04/11/2012 - 17:20 | 2335985 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

It is easy to avoid things like the RMBS when you are an insider and profiting off of the collapse.

Wed, 04/11/2012 - 16:33 | 2335776 slewie the pi rat
slewie the pi rat's picture

you state above that you "respect JPM CEO Jamie Dimon" and go on to say "He is a great operator and wouldn't likely know if Iskil was using back-door contacts"


here is a very silly question;  Do you also respect Lloyd, Warren, Vikram and Ben? 


as for one of your proposed solutions "We can do this through a complete, physical separation of the two business units" 

you mean like when Billy Boy of pimpco was hired by the FED to oversee a few hundred billion of toxic assets and promised that group of pimps would be in a different building (with an unlisted phone number) than the main hoe house


or the bankster we all respect Larry the Fink who promised to manage the AIG toxicity under a separate rock




Wed, 04/11/2012 - 21:05 | 2336562 Tijuana Donkey Show
Tijuana Donkey Show's picture

To be perfectly clear, no one respects Vikram, not even Vikram. He's a jockey on a horse racing to the glue factory. 

Wed, 04/11/2012 - 17:56 | 2336095 Likstane
Likstane's picture

slewie the pi rat is a lying thieving piss bag.  FAKE

Wed, 04/11/2012 - 22:00 | 2336670 Likstane
Likstane's picture

no really, FAKE

Wed, 04/11/2012 - 16:34 | 2335844 NotApplicable
NotApplicable's picture

You know, I'd like to think anyone that talks about respect wouldn't steal someone else's identity.

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