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.


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Thu, 05/17/2012 - 09:37 | 2434972 windcatcher
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.


Thu, 05/17/2012 - 08:40 | 2434715 Quinvarius
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.

Thu, 05/17/2012 - 05:40 | 2434425 MiniCooper
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.

Thu, 05/17/2012 - 02:04 | 2434260 ItsDanger
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.

Thu, 05/17/2012 - 03:12 | 2434313 Western
Western's picture

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

Thu, 05/17/2012 - 00:31 | 2434146 spooncutter
spooncutter's picture

great article!

Thu, 05/17/2012 - 00:30 | 2434141 Socrates
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.

Thu, 05/17/2012 - 00:24 | 2434128 Some Bloke
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...

Wed, 05/16/2012 - 22:53 | 2433966 General Debility
General Debility's picture

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

Wed, 05/16/2012 - 22:46 | 2433955 luckylogger
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.

Wed, 05/16/2012 - 21:01 | 2433669 andyupnorth
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.

Wed, 05/16/2012 - 21:42 | 2433797 Buck Johnson
Buck Johnson's picture


Wed, 05/16/2012 - 16:23 | 2432929 Joe The Plumber
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

Wed, 05/16/2012 - 16:21 | 2432916 world_debt_slave
world_debt_slave's picture

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

Wed, 05/16/2012 - 16:12 | 2432891 tony bonn
tony bonn's picture

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

Wed, 05/16/2012 - 16:09 | 2432877 Widowmaker
Widowmaker's picture

Fuck Dimon.

Lying faggot.

Wed, 05/16/2012 - 16:05 | 2432871 kurt
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?

Wed, 05/16/2012 - 15:29 | 2432750 topshelfstuff
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

Wed, 05/16/2012 - 15:28 | 2432735 Squealgies
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!

Wed, 05/16/2012 - 15:16 | 2432693 Kastorsky
Kastorsky's picture

he is a jew

Wed, 05/16/2012 - 16:17 | 2432908 lasvegaspersona
lasvegaspersona's picture

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

Thu, 05/17/2012 - 00:01 | 2434101 noname
noname's picture

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

Wed, 05/16/2012 - 15:07 | 2432655 Eric L. Prentis
Eric L. Prentis's picture

Jamie Dimon, run, run, runs his mouth,

Instead, resign, resign, resign, please!

Wed, 05/16/2012 - 14:54 | 2432582 SILVERGEDDON

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

Wed, 05/16/2012 - 14:53 | 2432549 DaveyJones
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

Wed, 05/16/2012 - 16:17 | 2432903 lasvegaspersona
lasvegaspersona's picture


FOFOA splains it pretty good

One of his best pieces.

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

Wed, 05/16/2012 - 14:35 | 2432489 Augustus
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.

Wed, 05/16/2012 - 15:10 | 2432550 George Washington
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 ...

Wed, 05/16/2012 - 18:51 | 2433341 New_Meat
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!!!}}

Wed, 05/16/2012 - 22:22 | 2433904 Goldilocks
Goldilocks's picture

Snap - The Power (HQ) (4:25)

Wed, 05/16/2012 - 14:30 | 2432459 SILVERGEDDON

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.

Thu, 05/17/2012 - 08:16 | 2434639 MeetTozter
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.

Wed, 05/16/2012 - 14:06 | 2432311 williambanzai7
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.

Thu, 05/17/2012 - 06:18 | 2434449 OldPhart
OldPhart's picture

Wanted to hear what the linked video had to say.

Wow, age has not been kind to Morticia Addams

Wed, 05/16/2012 - 15:45 | 2432810 sgt_doom
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!

Wed, 05/16/2012 - 14:42 | 2432506 Zero Govt
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

Wed, 05/16/2012 - 21:19 | 2433713 philipat
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?

Thu, 05/17/2012 - 05:32 | 2434417 BeetleBailey
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."

Wed, 05/16/2012 - 14:18 | 2432411 resurger
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

Wed, 05/16/2012 - 16:09 | 2432884 ZeroPower
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. 

Wed, 05/16/2012 - 20:51 | 2433647 ThisIsBob
ThisIsBob's picture

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

Thu, 05/17/2012 - 07:04 | 2434494 Karl von Bahnhof
Karl von Bahnhof's picture

JP Organ

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