A Defense of the Morg

Bruce Krasting's picture

Man-o man did the Morg screw up! Let me count some of the ways:

- It announced a $2B loss, but everyone in the market knows its trading book, so the losses have nowhere to go but up.

- Investors took JPM’s stock behind the woodshed and beat it with a stick. The one-day damage resulted in a $14.5B (9.5%) drop in the market cap for the company.

- The SEC, the Fed, and the UK's FSA  have all initiated investigations into what went wrong. This insures that this story is going to remain on the front pages for at least another month.

- The timing of this debacle could not have been worse. Any chance that the big banks had of creating some wiggle room on the Volker Rule has been lost. Over time, the tighter regulations that will certainly follow will cost JPM multiples of the loss the have incurred so far. The other big banks have the same problem. The CEOs (and the shareholders) of the big banks must hate Jamie Dimon.

- Dimon will lose one of his best friends, Obama. There is no way the White House can look the other way on regulating the banks anymore. This is an election year, so red meat is needed to get votes. JPM/Dimon has served itself up as a roast beef and is just waiting for folks to start slicing it up.

- By far and away the worst aspect of the story is that the big brass at JPM did not have a clue as to how risky their “hedges” were. The big shots thought that the bank was reducing risk, actually it added (substantially) to the risk it was facing.

It’s possible that I’m the only person in the world (other than Dimon and the JPM Board) who has any sympathy for poor old Morg.

As of today, I’m operating under the assumption that the losses at JPM are the result of hedges that went bad. The original intent was to minimize risk, the result was exactly the opposite. This was not about some rogue trader that hid the risk that was being taken, senior management was (sort of) aware of the “hedging” trades that were put on by the bad folks in London.

Hedging risk is a very complicated business these days. There are two ways of reducing risk, (1) sell everything and go out of business, or (2) do what you can to manage risk, and at the same time recognize that there really are no effective hedges.

It is very difficult to reduce risk without taking on derivative exposure. That is the way of of our financial system. To make this point I’ll describe what I did on Friday.

Two weeks ago I reported in this blog that I had bought a one-month put option on the EURUSD. The option is at a strike price of 1.3210 (spot price at the time of execution). As of this past Friday night I’m three big figures into the money on this position. For me, this is the equivalent of a double in baseball. I’ve not hit many doubles of late, so the thought crossed my mind that I ought to take some chips off of the table.

To be honest, I was troubled with the price action of the EURUSD in the latter part of the week. Yes, the Euro cross closed on the lows, but to me the price action looks sticky. I’ve only got two weeks left on this option, I know from past experience that under 1.30 the damn Euro has found demand in the past.

It’s my best guess that the news flow out of Europe is going to get worse over the next fortnight. There is a reasonable chance that things go wrong and we see another big price adjustment in the EURUSD. To my eyes it looks like there is a good possibility for a move to 1.2500. If that happens my “double” will turn into a home run. I could use a home run (who couldn’t).

I pondered this on Friday. What to do? How does one reduce risk, and at the same time stay in the game? I chose a hedging strategy that is not unlike what the Morg did to protect its book. I took a derivative position against my short EURUSD position; I bought USDYEN.




I’ll take all the criticism that readers can dish out on this trade idea. I can understand if someone were to say, "It was the ‘wrong’ thing to do".

In a number of ways I added to the risks that I was taking. There is no certainty that my new Yen position will act as a hedge against the existing EURUSD short. I have substantially increased my market exposure overall. I now have two long dollar positions. If some event happens and the result is a new market mood that translates into a “Sell the dollar across the board” mentality I will get my head handed to me.

The flip side is that there is empirical evidence from the market that when EURUSD goes lower, USDYEN also moves lower. That’s just the way it is. So if the Euro does find some stability in the next few weeks that results in a higher EURUSD I will give back some (all?) of the gains that I have in the option position, but it's damn near a sure thing that if that happens, USDYEN will move significantly higher. So I do have a hedge on.

Part of my thinking here is that at 79.90 the USDYEN is a buy. Yes, the position should be a hedge against the EURUSD short, but it also could end up a win-win for me. The EURUSD could weaken and I get fatter while the USDYEN could be flat. So I’m speculating with my hedges. I know that. This is exactly what JPM did with its hedging activity. It chose to put on a derivative short, against a book long. Call this “aggressive hedging”.

A big question for me was how much do I short the Yen to offset the short EURUSD exposure? There is no answer to this. There is no formula to look to. I’m “hedging” in two different markets; there is no certainty that there is a correlation between the two. If I have $1 short EURUSD, how long USDYEN should I be to create an effective hedge? Is it 1 – 1? 0.5 – 1? 2 – 1? This is not science, it’s guess work.

I think that JPM screwed up this critical calculation. They bought some protection in a market that they thought was correlated. It turns out the were right, but they bought too much protection so the hedge losses ended up being greater than the gains from the underlying portfolio. If JPM had hedged with a much smaller exposure to CDX.NA.IG.9 (the derivative contract that done JPM in) the headlines would have been different. We might have gotten these instead:








Much to Jamie Dimon's chagrin, we will never see those headlines.


I wouldn’t be surprised if most readers thought I was nuts. Hedging one exposure with a derivative position in a different market is not de-risking, it is adding to risk. But in the complex world we live in there really are no hedges that work. Everything is connected, every price is a derivative of something else. Everything is negatively or positively correlated. Right?

I watched Senator Carl Levin on TV Friday. He crapped all over JPM/Dimon. He wants the Morg out of the spec side of the banking equation. If the good Senator reads this blog, he would think I’m nuts, he would also make me the poster boy of why guys like me should be shut down. (I’ll be sure to send him a link)

It might just be that this ends up with Levin getting his way. More regulations, a transaction tax, or a very high tax rate on short-term capital gains seem likely as a consequence. Maybe that is how this should resolve itself. Kill the beast.


The risks are out there folks. Chasing small fry like me, and “Whales” like JPM into the bushes does not take the risks away. It magnifies them. For example:

- Since the start of May we’ve had a minor correcting in the stock markets. Hardly a ripple. But the Wilshire 5000 is down by $600 billion. Apple’s stock value has risen by $47B and then fallen by the same $47B in the last thirteen trading days.

- The market value of US government bonds has soared the past two weeks. At this point every high-grade bond in existence is trading at a premium. The funny thing is that every cent of that market premium has to go to zero.

- The Euro is down by a lousy 2.5%, but a different way to look at it is that the value of Euro denominated assets fell by more than a Trillion dollars on a relative basis. I doubt that one in a thousand even noticed the change.

I don’t think that anyone who lives on the grid is free of macro, derivative or tail risk. They might think they are, but they are not. The upcoming effort to curtail the risk takers may make many “feel” good. I think those same folks will regret it when the specs get put in a pen.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Roger Knights's picture

"I chose a hedging strategy that is not unlike what the Morg did to protect its book. I took a derivative position against my short EURUSD position; I bought USDYEN."


Now you're cooking with both burners!

On your way to that home run.

(The first position is down and the second is up.)

Coldfire's picture

I find it strange that JPM would announce this face-losing loss. They don't need to make a public appeal for a bailout as the Fed will simply bail them out secretly. If it hasn't already. The Fed has already delayed the implementation of the Volcker Rule to July 2014 and expressly indicated it reserved the right (npi) to further extend the delay. JPM is the primary dealer. They'll get whatever they want.

silverdragon's picture

Break them all up into much smaller pieces and then let them compete with each other.

Mr Lennon Hendrix's picture

The "damn euro"?  You are showing your colors, Bruce.  Thus why no one really has a good take on things - ya'll are trying to trade and at the same time report.  Stop pushing the buttons.


malek's picture

 "There is no formula to look to. I’m “hedging” in two different markets; there is no certainty that there is a correlation between the two."

Until the day when there's a market crash, and pretty much all correlations go to +1

And then your "hedging strategy" looks more like the proverbial picking up nickels in front of the steamroller.

jmcadg's picture

Hey Bruce, there's nothing wrong with your hedges or JPMs hedges, so long as if you lose, you take the loss.

No taxpayer bailouts, you fuck up, you carry it.

q99x2's picture

Great post. Your honesty and insight are appreciated.

JPM is too big to exist.

Outside of politics it has outgrown its counterparties.

Sutton's picture

Bruce, the point is, no one has a problem with prop trading, like how individuals do it, or say ,First New York etc.  You win , great.  You lose, tough luck, die like a man.

The TBTFs though, want bonuses for wins, and bail-outs for fiascoes, with no claw backs.

Joebloinvestor's picture

It is being reported that the SEC has just opened a new investigation into the losses suffered by the opening of "John Carter".


Peter Pan's picture

JP Morgn lost 2 billion but doesn't that mean that someone made 2 billion?

Having said that, if I was a regulator i would force the JP Morgans of this world to run their businesses in the sewers with the entrance being at some street grate.

How people choose to do business withese people is beyond me.

onlooker's picture


Agree or disagree with Bruce, you gotta admit that he tells it like it is-as he sees it without Hedging his views with BS. And that makes him an honest man. A very rare creature in today’s world. His trade is documented and with rationale of why. Rare indeed.

Keep writing Bruce, it is always a good day to see your article on the ZH board.


HD's picture

TBTF banks hold the entire financial system hostage - they should be utilities, nothing more.

Dingleberry's picture

Seems to me like a lot of shenanigans come out of London.....Larouche appears to be correct. That place is the epicenter of financial fraud, bar none. Far worse than Wall and Broad.  No wonder he was ridiculed for so long. He told the world the truth.  No one listened.  

CPL's picture

Jamie Dimon is going to go into my books as a Hero, either intentionally or unintentionally just destroyed the entire concept of the prop desk.


The man is a fucking hero.  JPM has it's tenticled reach touching  everything and has been price fucking it's customers for 100 years.  Dimon did in a single meeting that all of us arm chair economists have been saying should have been happening over the last five years.


He shot financial insitution prop trading right in the head and finished it off...with a cherry on top, JPM was downgraded to untrustworthy with a side of the companies future being rotten.  It was only a matter of time and math.  Dimon was only the first of many, many, many more financial blow ups we should be enjoying the cheap seats through the summer.


I'm not saying buy the man a cape and put an S on his chest.  But something about the timing of his announcement strikes me as odd.  These people are pros are hiding a couple of billion dollars, why start to tell the truth now?


Seems odd non?

DeadFred's picture

I'm still trying to grok why Dimon held the conference in the first place. The fallout couldn't have surprised him and he could easily have shirked any SEC regs that made it mandatory. Does anyone really think the SEC would have done anything if he just hid the losses? What did he gain by this? Maybe a bear trap in the making? Maybe his contribution to a correographed pump and (now) dump scheme to own even more of the economy? This is JPM, there is an ulterior motive. Bet on it.

CPL's picture

Same assholes hid a trillion dollar housing problem...how does a 2 billion dollar loss mean anything?


I have some suspicions, most fall into the "fuck it, I'm rich and set therefore nothing will stick".  I've never heard of any trader thrown in jail for incompetence.  Usually they are doing their jobs really well and just making up financial voodoo like the ponzi people.

palmereldritch's picture

It probably resides with legal disclosure obligations so that no matter however horrendous the loss, Jamie has now taken action to cover himself from personal liability...it could be that he is potentially on the hook and exposed as a Director somewhere or has covenants with obligations to declare which now fulfilled in whatever lame form will mitigate his sorry ass...

CPL's picture

Ahhh...disclosure...where would we be without that.  So he's dumb but has good legal council.  I don't buy it for a second.


Something else is coming, I'm going to have to agree with the Tyler's, the CDS market is going to collapse...again then the near nuclear 16 trillion dollar option to bail them all out again.

palmereldritch's picture

He's as dumb as his legal counsel tells him he should be...

I am the ripper man a locomotion mind love american style
yeah i am the nexus one i want more life
fucker i ain't done yet

more human than human




Piranhanoia's picture

Bruce masturbates in public.


CPL's picture

So what if he does?


You asking for directions to the show Mary?


Bring your man purse and your little lap dog while you are heading there.  Make sure you wear your flats, those man canoes won't float if they don't fit princess.

Convolved Man's picture

As I sit here looking out my window at a light rain shower, there are currently two drops of water slowly sliding down the window pane.  I have made a substantial bet, next months rent, that the left most drop will reach the bottom of the pane before the right most drop because I'm aware of a slight imperfection in the glass below the right most drop which will cause it to drift sideways, further to the right, shedding some of its downward velocity.

Since I know I can't afford to lose this bet, I need to hedge it with one of like value.  Fortunately, there is a slug slowing oozing its way from right to left near the bottom of the pane leaving a slime trail which is causing drops to bead up, preventing them from sliding to the bottom of the pane.  At its current pace, the slug will surely pass beneath the right most drop before the left most drop reaches the bottom of the pane. 

With confidence, I place a bet of another months rent that the right most drop will be trapped by the slime trail and not reach the bottom of the pane.

This seems like a safe hedge.  If the right most drop is trapped, I stand to win double a months rent.  Even if the right most drop is not trapped, it surely cannot beat the left most drop to the bottom of the pane, so I will break even.  However, in the highly unlikely event the right most drop manages not to be trapped and beats the left most drop, I will be out two months rent.

The game is on.  The drops are sliding downward, right most drop falling behind, drifting rightward as I anticipated.  The slug continues slowing oozing along...

SHIT! Did you just see that!  A bird just snatched the slug right off the window!

B-B-but, the game is still in play.  Come on left drop, keep on sliding for daddy...

WTF! It stopped cold! What's that, a speck of dirt?  Ah, come on man, I can't believe this. 

Ok. Ok.  Don't panic.  The right side drop is drifting, rightward, rightward, it's above the slime trail.

WTF!! it's drifting back to the left. NO! NO! NO!

Ha. Ha. Pay up fool.


Hello? Mom? Happy Mother's day!  Yeah, uhhh, I'm fine.  Listen, can I ask you and dad for favor.

DeadFred's picture

Come on, you're JP Morgan, when the bird snatches the slug take a hammer to the window and have the Fed replace it.

kraschenbern's picture

A fine example of not paying attention to the gambler's ruin problem.  Thank you. 

Never make a bet you can't afford to lose.

Cosimo de Medici's picture

JPM's trade blow-up reminds me of LTCM.  LTCM had formulas that assumed static correlations over the time frame of the position, and then they assumed a certain amount of liquidity, when in fact THEY were the liquidity.


williambanzai7's picture

This is another warning just like LTCM. Derivatives may be a hedging tool. But moral hazard and cheap leverage turns them into FWMD and the people who blew up LTCM were likewise geniuses who fell to human weakness.

The bottomline is not to dissect the trades, but to ask why are we dissecting? We would not be dissecting if this was not the mother of all TBTF banks.

williambanzai7's picture

"It’s possible that I’m the only person in the world (other than Dimon and the JPM Board) who has any sympathy for poor old Morg."

And Bernankes doing a good job in this recovery...

Don't tell me you are Brusca!

It all makes sense now, why didn't I see the pun.

The problem my friend is risk concentration. That is what JPM is. One big whale of risk concentrated by size, leverage and moral hazard.

No need to complicate a simple principle, the bigger the pot the more shit inside. The more shit inside, the deadlier the bomb.

Bruce Krasting's picture

JPM still has a market cap of $145B. That is "real" money. The market says so. So they lost 1.5% of that.

They have $2T in assets. They lost .1% of that.

I don't disagree that Big is Bad in that the risks get concentrated. What is the alternative?I don't see one.

My point is that the "alternative" is going to put a penalty on risk taking. The end result will be that the risks become more apparent as there are no longer any brakes.

williambanzai7's picture

I'm all for risk taking, but there is no risk taking for the people that manage these huge whales. They pay zip on our deposits, they are propped up by cheap Fed money, they know they are back stopped by Uncle Sam and the Fed and they are desperate for trading revenues sufficient to pay their management hundreds of millions in bonuses. It's all wrong in so many ways.

The alternative is to break them up. I don't cater to the narrative that limiting size or scope is financial Luddism. we should be able to say I don't give a fuck I'm not a JPM shareholder.

kraschenbern's picture

Absolutely!  Risk takers deserve their rewards for success; and that's why they take the risks.  But the world needs to be more Darwinian;  high stakes gamblers must face up to the problem of gambler's ruin - forcing innocent bystanders to cover your losses is moral hazard pure and simple.  Take away the safety nets.

The Alarmist's picture

The Alternative is to simply mandate that every citizen ... sorry, US Person has an account at Treasury Direct and mandate that all payments for that person will be directly deposited there.  This will solve a number of problems: First, it will help ensure that appropriate taxes can be taken after all mandated payments via that account are scrutinised to ensure the deductions are applied.  This would also have the added benefit of capturing all that "main street" capital that used to flow via Wall Street to the titans of industry.  The TBTF's will never be dismantled because, just like the Water Company or the Electric Company, they are useful idiots who help allocate capital to semi-productive purposes in the economy.  Small business, however, is something to be wiped out at any opportunity.  

the grateful unemployed's picture

not only do they pay themselves bonuses, but they kickback that money to the encumbents in the form of campaign contributions. what's going on here is racketeering, with the Fed subverting not only the fixed income market, but the political process. now that JPM lost money, but doesn't require a bailout, at least that's what the sheeple will be told. if Corzine could steal clients money, and go bankrupt, and nobody did anything about it, this one is a non-starter. i see this process building steam, since W Bush laid the constitution down as a doormat. each time you break the law, and nothing happens, the next time it gets a little easier. obama gives money to solyndra, they give money back to him, then do Ch11, and nothing happens?

i blame the fed, not the sec, because a free market is a self regulating mechanism, you deny the market its fucntion, and all that is left is hard justice, jail time for business men. its sad really, these guys would probably like to stay within the law, but who caused this? initials BB

Piranhanoia's picture

If anyone doesn't understand where the author is coming from,  he believes what JPM says. 

falak pema's picture

Once a trader always a trader...never question the casino economy if its the branch you sit on!

falak pema's picture

words that Clinton and Greenspan should have meditated on instead of sucking the tit of 'Atlas shrugged', in watered down NWO-Reaganomics. Its always difficult to perceive oneself as Mogan La Faye, she who will destroy Camelot, when you play at being the Lady of Shalott! ..."Oh, if only I'd known I'd never have asked the question : mirror, mirror on the wall who is the fairest empire of them all!" Its the question that begs the answer and from then on its never ending slide after the heady hiatus of feeling your head come out from the clouds to behold on Mount Olympus. 

"The fault dear Caesar lies not in our stars that we be the underlings...That was Truman before Hiroshima....Until it leads to murder and battle of Philippi. Then all that is left to say is : Here lies the most noble roman of them all! That was JFK.

From then on...until today,  its the MOrg and Jamie Dimon...we are the happy few, amen! 

Sixty years of PAx Americana encapsulated, like a blue pill from Pfizerrrr.

Haole's picture

Wonder which way PMs are going to go tonight/tomorrow?

Dollar Bill Hiccup's picture

Every investment is now speculative, thanks to the cumulative efforts of the central banks and the impairment of clearing mechanisms in the markets. Like those guaranteed US Treasuries? The guarantee is gone, and if a default does not get you, inflation will.

Even your FDIC deposits will only stand up under enough strain through eventual government monetization of the debt and resulting inflation. Oh, maybe not now, perhaps the bad money in the system outweighs inflation, but sooner or later, the inflation cometh.

What's amazing w/ JPM is that it's not amazing at all, it's par for the course. Power corrupts, and absolute power corrupts absolutely. Every hedge carries a basis risk and some more than others. The biggest thing that needed to be hedged was the inflated egos at the bank but  the only way to hedge a bag of hot air is with a sharp needle.

Kayman's picture


"perhaps the bad money in the system outweighs inflation,"

Best question of all.

Next question ?

Does the $600 Trillion of unregulated derivatives count as M3 ?

Dollar Bill Hiccup's picture

Since M3 is no longer tracked, it is simply a figment of the imagination.

As the Chairman recently noted, the FED does not print money. He produced a chart showing the level of currency in circulation as more or less constant. And of course he added, the money that the FED does not print which is used to buy Treasuries that have just been bought by primary dealers from Treasury auctions, that money in turn doesn't do anything or go anywhere, it just sits with the FED on reserve. How could that possibly be inflationary?

On the brighter side, derivatives exposure would probably in the end be massively deflationary, since the assets do not exist to make good on claims. Which would then become massively inflationary as more money that the FED does not print is created to offset it.

You're only talking ten years of global GDP at any rate.

the grateful unemployed's picture

yeah they'll put JPM on the menu to prosecute, as Roast Beef, but on November 6th that will be downgraded to leftover Meatloaf, and the charges will disappear. it really doesn't matter which friend of Wall Street gets elected the day before, the day after is forgiveness day,  (as long as JPM gives plenty of money to both)

Rari Nantes In Gurgite Vasto's picture

Dear Bruce, sure the market is just one way, Jpm/macris/bruno et all are the villans right now, and if this was a court they will have the right to a defence lawyer and a fair trial .

However I think your post misses the point, starting from you example of hedging a simple directional trade.

You should have sold some eur/$ put with the same maturity of the one you bought few weeks ago but with a lower strike.

Do you think eur/$ is going to trade at 1.25? would that qualify as a home run? then that is where you should try to take your money and run. Sell the 1.25 put then! Simple and effective, you would be taking some risk off your book while still being able to dream about your run.

K.I.S  ( I obmitted the second S on purpose because I don't thik you are stupid).

So to JPM, have they implemented the simplest hedge possible? most likely not, the have used  the "$/yen" of your example, and have done so in such a way that they did not corner a market but they got cornered by their own positions.

JPM cio office manges risks that are not as easy to manage as your eur/$ position, but the same principles apply.

Never Mr. market has never allowed any partecipant to build a dominant and well known position (to the others), without crushing such "arronagant" partecipant at some stage.  Jpm/macris/bruno should have known this, and never thought to be the first to break this rule...

No defense lawyer needed for JPM, just some sensible, intelligent managers and traders.

fuu's picture

"It’s possible that I’m the only person in the world (other than Dimon and the JPM Board) who has any sympathy for poor old Morg."

WTF Bruce, sympathy?

palmereldritch's picture


Please allow me to introduce myself
I'm a man of wealth and taste
I've been around for a long, long year
Stole many a man's soul and fate

I was 'round when Jesus Christ
Had his moments of doubt and pain
Made damn sure that Pilate
Washed his hands and sealed his fate

Pleased to meet you
Hope you guess my name, oh yeah
But what's puzzling you
Is the nature of my game

I stuck around St. Petersburg
When I saw it was a time for a change
Killed the Czar and his ministers
Anastasia screamed in vain

I rode a tank
Held a General's rank
When the Blitzkrieg raged
And the bodies stank
Pleased to meet you
Hope you guess my name, oh yeah
What's puzzling you
Is the nature of my game, oh yeah

I watched the glee
While your kings and queens
Fought for ten decades
For the Gods they made

I shouted out
"Who killed the Kennedys?"

....Tell me, baby, what's my name?


fiddy pence haff pound's picture


JPM, as I read recently, didn't lose any money in 2008.

I know that's not true, but imagine how many tricks and how much control

of the game they had, in order to make it look like they didn't lose.

Either there's an insider who's been doing a Nick Leeson job, or

this is the smoke screen for a massive fascist move to control things

even more, now that the Occupy message seems to be seeping into

the mainstream media (Jim Grant, Santelli, Sprott etc) such that these shadowy mafia

types, otherwise known as bankers and politicians, have fewer rocks to hide under.

or maybe the US is planning something because the dollar hegemony is deflating fast.

Let's go, black swans!



Centurion9.41's picture

In the game of speculation, just like poker, if you have unlimited money at your disposal, you will win. 

The banksters have the Fed.  Try playing poker against the Fed.

P.S. - this fact is why Vegas has both table limits and hand limits.  If they didn't, a whale with unlimited money could come in and eventually take all their money.  That's a mathematical fact.

WallowaMountainMan's picture

'if you have unlimited money at your disposal'

it can't be QE/unlimited money to infinity. QE/um does not go that far. it only goes 99% of the way to infinity.

and that's what the score reads. 99 to 1.

in the real big macro world of finance, getting to be of the 1% side is a black swan event. In and of itself. math says so.

fiddy pence haff pound's picture

so, they've got the most money at the world table. Is that it?

what if you've vulnerable debts and the rest of the world starts

picking that scab, or starts ignoring your money, and deciding not to

play with you or against you?

America has had the chip of choice, the dollar. But not for long.

Who's the 'house' in international banking?