JP Morgan Used “Hedginess” to Engage in Illegal Speculation

George Washington's picture

Smart people like Sajiat Das, Karl Denninger, Tyler Durden, Yves Smith and Janet Tavikoli have all demolished JP Morgan’s argument that it’s recent multi-billion loss was caused by a hedge gone wrong.

Now, former senior S&L prosecutor – and current professor of economics and law – Bill Black provides a succinct and memorable take-down of the faux hedges:

The claim from out of JPMorgan is nobody was looking very carefully at the supposed hedge, and the hedge didn’t perform to offset losses, instead it increased the losses and increased the losses dramatically. And supposedly, no one was looking, and no one adjusted for this. And they woke up, and they had a $2 billion loss. So that’s the story from JPMorgan [which] doesn’t make sense.




If you have distressed European debt [the underlying asset holding that Dimon against which JPM's so-called "hedge" was made], you’re supposed to have already reserved against the losses in it. So, why hedge the position at all? Just sell it. Get rid of these incredibly risky assets before they can suffer any additional losses. If you’ve already got loss reserves, you don’t even have to recognize a loss, because you’ve already reserved for it. So, you shouldn’t have had to hedge, period.


Second, if you were going to hedge, he should have hedged. And the way you would hedge something like this is to buy a credit default swap protection against the bad assets. That would hedge. In other words, if you lost on the value of the European debt, the credit default swap would go up in value, and you would be protected against loss. Instead, they have allegedly bet in the opposite direction by buying this derivative of a derivative. If the European debt lost value, the derivative of the derivative was also likely to lose value. Well, that’s not a hedge. That’s a double speculation in the same direction. You’re doubling down on the bet.


And the reason you’re calling it a hedge is because it’s illegal, under the Volcker Rule, to speculate in this fashion. So the story coming out of JPMorgan doesn’t make any sense as a financial matter. It seems reasonably clear that this is faux hedges. This is, you know, to hedging like truthiness is to truth. So this is hedginess: not really a hedge, but you call it a hedge to evade the law.




Even when the Volcker Rule was adopted, over their opposition and over the opposition of the Federal Reserve and of Treasury Secretary Timothy Geithner, who remains true to his former boss, Jamie Dimon, after that, they gutted the rule—at least the draft rule to implement the Volcker Rule. And unless it is changed, the Volcker Rule will be essentially unenforceable, because you’re allowed, under the current draft, to simply call something a hedge, even though it operates in the exact opposite of a hedge. And voilà, this hedginess is OK, and the losses just mount up and produce the next disaster.


Comment viewing options

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

What a hoot! The left hand stole 2 billion from the right hand and no one knows what the bet was or where the “money/debt” went!


Let me get this straight: an inside trader bet 1 billion on a sure thing (something) and did not hedge his bet but instead doubled down on the 2 billion dollar bet—maybe the sure thing was stealing the money/debt. Ha. Ha.


Quinvarius's picture

JPM uses stupid playbooks where the assumption is they can trick the market into doing the opposite of logical using massive derivatives leverage.

MiniCooper's picture

Not making any comment about JPM whatsoever here but I come from a commodity trading backgroud and really think the true test is going to come when commodity markets fall sharply. They have a nasty habit of becoming illiquid and gaping limit down. Its then we shall see who is 'hedged' among the investment banks, hedge funds and other financial specualtors/investors in these markets.

Thinking way back in my own experience of similar sharp commodity price falls, especially in oil markets, financial players always suffer badly in these periods of commodity market collapse because the spot physical oil trading houses have so much more flexibility and physical capacity to place distressed contracts and take advantage of contango. Financial firms have little or no physical capacity and have to close financial positions at steep losses when margin calls arrive or face ever accumulating losses as they roll contracts for months/years up the forward curve.

ItsDanger's picture

It was probably just speculation on JPM's part.  Perhaps 5% was actually a hedge, who knows if it was any % really.  A hedge should only be to cover potential losses, otherwise its just a naked trade.

Western's picture

Basically there was no hedge.. the trade hasn't even compressed yet, and it's already >3billion in losses.

Socrates's picture

It would be great to seen this smug, prick Dimon go to jail and have as his cell mate Lloyd Blankfein. Let them do a prison ministery as they are only doing God's work.

Some Bloke's picture

I was the other side of this deal, just waiting for The Bernank to add a few zeroes to Jamie's account, then transfer to me, via Corzine, should be later today...

General Debility's picture

Thanks for the transcript GW. I half did my own and then found yours. Wonderful!

luckylogger's picture

In reality this was a hedge against better times coming. as the yeild curve would have flattened and that would make this hedge work............... problem is he took advantage of the free money from the FED and kept selling after he ran out of buyers.

Anybody here that has traded much has tried the martingale system and knows it kills you in the long run. Amazing that the whale was allowed to use the simple martingale system but he probably thought --- WTF--- I have a gazillion free dollars and can manipulate any market...................Imagine that all the banks with their tenticals to the Fed have been doing it.....

It is awsome that they got busted................ Unfortunately we will stilll be stuck with the same problem at the end of the day.

andyupnorth's picture

My big illegal speculation is a hedge against my other big illegal speculation!

P.s. Sometimes I'm so funny I surprise myself!

P.p.s Tyler, feel free to use my line.

Joe The Plumber's picture

Jamie dimon knows it wasnt a true hedge under GAAP or VaR

Which is why he carefully chose the words " economic hedge" so he couldnt be busted for lying to stockholders

He can parse words and definitions with such exactitude that it is hard to believe their defense which is that they were stupid and clueless and a bit slack with the management

The truth is that he knows very well the bank was trading in its own account. Something that is supposedly illegal his type of bank

world_debt_slave's picture

if it looks like a Dimon and quacks like a Dimon, you be fucked by a Dimon

tony bonn's picture

in addition to doing mammon's work, dimon is a lying arrogant sack of shit....

Widowmaker's picture

Fuck Dimon.

Lying faggot.

kurt's picture

Who was on the other side of the LOSS? Where'd it go? If it was a bad bet who got the vig? Which Soprano?

topshelfstuff's picture

how come nobody asks Cui Bono?...Who Benefits...who has the other, winning, end?...could it be...

just like the Corzine scheme

Squealgies's picture

JP Morgan about to issue Fukishima Daiichi I, II, III, IV CDO, underwritten by London desk. Watch out for the IV tranche!

lasvegaspersona's picture

so were Jesus and Bob Dylan...neither were bankers though, maybe one was a cardiologist ...can't recall

noname's picture

you know its funny, they both found christianity. Funny how that works??

Eric L. Prentis's picture

Jamie Dimon, run, run, runs his mouth,

Instead, resign, resign, resign, please!


Jamie's trying to Rick Rule the media on this one.......................................again.

DaveyJones's picture

Hedginess and truthiness caught me too 

Jamie talks exactly like our useless politicians and leaders because the two have merged in a mutual criminal act to hide the pathetic economic truth, substitute its own people for the abandoning foreigners in supporting our fiat currency (,) and to siphon whatever capital is left off of a dying middle class

lasvegaspersona's picture


FOFOA splains it pretty good

One of his best pieces.

Please proceed to your pre-assigned lifeboat, we are going down.

Augustus's picture

It is impossible to claim that the trades were illegal.  No regulations have been nalized to implement the new laws.


As normal for Geo Wash, the article is full of nonsense and short on facts.

George Washington's picture

Augustus, why do you ALWAYS have to side with the people EVERY TIME and attack the elite powers-that-be that have all of the corporate media and politicians as their mouthpieces on EVERY ISSUE???

Oh, wait ...

New_Meat's picture

OR THIS!!!!!!

Hey, GW--not at all off-topic.  I'm really looking forward to your analysis of Elizabeth Warren's claims and her climb to prosperity as a Havhad Law School Professor.

Inquiring minds wish to know your lucid opinion.

- Ned

{after all, Elizabeth Warren is the Motha' of the Occupy movement, I'm sure that you have that reference.}

{{and, well, YES, YOU HAVE THE POWER!!!}}


Jamie is a lying sack of bankster shit. He knows exactly what went down everty step of the way. Like he said, he is in charge, and the buck stops with him. Okay, hard time for being a thief, motherfucker. See you in life without parole for turning the USA into a train wreck along with all the rest of your rocket scientist buddies in banking and government over the last 5 years. Being shot, pissed on, rolled in flour and deep fried is too easy. Do the hard time, felony boy.

MeetTozter's picture

It's all just a word game for Jamie - why not stick a hot poker up his backside and tell him it's a BONUS.

williambanzai7's picture

We know that Dimon ordered his people to chase yield.

That is really all that needs to be said to explain why this happened. Banks are casinos not public utilities if you want to pay the big bucks.

We also know that the bigger the position held the easier it becomes to guess who is on the other side of the trade. Which presents yet another reason why we should not allow risk to concentrate in a few humongous banks.

Finally, we know that this kind of giant financial swashbuckling became the norm after Glass Steagall was killed.

OldPhart's picture

Wanted to hear what the linked video had to say.

Wow, age has not been kind to Morticia Addams

sgt_doom's picture

You know, I think Greenberger's comments (law prof. at Univ. of Maryland, fomerly with Brooksley Born's CFTC) were correct:  Jamie Dimon probably didn't understand the trade, his CIO Drew probably didn't understand the trade, and Iskil probably didn't understand the trade --- but the other side sure did!

Zero Govt's picture

Agree with you all the way Banzai up to thinking Glass-Steagal would have solved or stopped anything

No regulation (or any Law) in history has stopped anything, nor has any 'safety net' such as auditors/accountants, balance sheets, dozens of regulators, Risk Officers etc... G-S wouldn't either

people are living in LaLa Land when they think Rules (or any rule/law based system) changes anything.. Rules actually cause chaos

philipat's picture

Glass-Steagall would have worked fine if the iBanks were all LPP's. Not only should taxpayer funds not be put at risk, also shareholder funds should not unknowingly be put at risk either. Casino Banking is just fine so long as the monay of the private partners is on the line and that of investorsd who knowingly take on the risk. That is actually a double win because betting with your own money does tend to focus the mind more clearly?

BeetleBailey's picture


Up until Glass-Steagall's repeal, banks had to "gamble" with their own money. Period.

The day the Act was repealed, my firms Principal said it most clearly;

"Banks can now bet with YOUR money now, as opposed to their own."

resurger's picture

BTW! Who profited from JP Global Loss?

The Hedge Funds, or there was a whale on the other side of the "Hedge"? I mean they all knew the crazy fucker was long the IG9

ZeroPower's picture

Word in the City was that every single hedgie took the other side of the trade. Iksil couldn't contain his shame and was "asked" to leave quietly event though he got canned. 

ThisIsBob's picture

Sounds like Honey Badger hedge funds.  Way to go!  Do it again.