An $8bn Loss Or Was JPMorgan 'Unhedged, Long-And-Wrong' Post-LTRO2?

Tyler Durden's picture

The full set of DTCC data is in (that is the repository for reporting CDS data) and reading between the lines provides us with some significant color on what was occurring at JPM's CIO office. For the Cliff Notes' version - see the summary at the bottom...


First things first, the position does not appear to have any HY9 tranche involvement at all, but a modest short HY credit index position was unwound in mid-Feb (we suspect related to the IG9 tranche unwind - since the delta ratio makes some sense at 1x ($25bn HY) to 5x ($120bn IG tranche). But nothing has been done since then.

However, when we look into IG9 gross and net notionals between tranched (the tail-risk hedge we believe they put on originally) and UnTranched (the index market where the whale managed to delta of the tail-risk hedge) the story becomes both confirming of our hunches and also very concerning.

The charts below tell the story of an early unwind of the Fed-induced-failure tail-risk hedge but an arrogant momentum chaser that left the massive long credit index position (hedge of a hedge) that had been the cause of dislocations in the Index-arb business (that other media entities have focused on) flapping into and after LTRO2 into around early-to-mid April (when we are sure Jamie got the call).

The drop in gross tranched notional was around $65bn in mid-Feb and a further $55bn this last week - which provides us with approximate sizing of around $120bn for the whales' exposure (tranched - in senior risk so modestly unlevered) - which is in line with the insider estimates of $100bn notionals. Furthermore the gross untranched (index) notionals dropped by around $100bn also which at a DV01 of ~$45mm implies the $2.5bn loss from the 50bp index shift alone.

Add to this the massive loss they would have incurred to get the remaining $55bn of tranche off the books in the last week (as a guesstimate - based on moves in the equity, mezz, and index positions that are the 'opposite' of the tail-risk hedge) around 10% of notional or a further $5.5bn loss) and the total loss is around $8bn.

However, there has been huge 'technical flow' in almost every liquid credit index (IG18, HY18, HYG, and JNK for example) which would have reduced the loss - though left considerable basis risk (hedging the loss with an imperfect hedge). Perhaps given the tranche unwind last week, the rally in credit indices this week reflects some more unwinds of the tail-risk's hedge and a slowing of the technicals in the market - leaving just weak fundamentals - though the basis risk (the difference in dynamics between the two side of the trade) could be very painful.


Think of the notional amounts as measuring the market's aggregate exposure to various indices - the details of net vs gross are important but do not change the narrative below...

1. HY9 net notionals are minimally changed the entire year - both tranched and untranched - the drop (and green arrow) is a tiny $0.6bn drop in net notionals (check right had scale).

2. HY9 Gross notionals show a drop of around $25bn in mid-Feb - which would fit with a beta-neutral HY hedge for an IG position - this was a short-cover in our opinion - which is a shame since it would have saved JPM a lot if they kept it on...

3. The main story is here!

In Mid-Feb, as with HY9 above, it looks like a decent chunk of the original tranche (tail-risk hedge) was removed (red line below). Whether this was in anticipation of LTRO2 - perhaps on the back of the market's massively strong momentum post LTRO1 (and his likely losses) - the whale appeared to decide to leave the index (blue line) long credit position in place (even though he had reduced his tail-risk hedge position dramatically.

This is the momentum-jockey arrogance of knowing better and having an unlimited capital account to draw on... in a nutshell - he had a hedged position into this point (that admittedly the delta was probably outperforming his original hedge quite well) and thinking he knew better, he just decided to get naked long credit (orange oval)...

Of course this basically marked the top in the market and instead of LTRO2 providing more ammo for the rally, it signaled the end of easing and market dumped. This put his hugely naked long credit underwater as he had less of a hedge against it now...

And as the chart below shows - the unwind (black vertical line) relieved some of the pressure on the IG9 skew (the spread between the index and the intrinsic value of the portfolio) - which had been stuck massively wide for months (orange horizontal arrow) until this unwind which allowed the arbs to get their payoff (dark red arrow)...

As is clear in early April - Jamie got the call and the position was cut aggressively (blue line)...

And this last week - we suspect the rest of the tranche (red line) was unwound (painfully)


4. As is clear below (red line) - this position was around 15% of the net notional of the marketplace - the IG9 market IS the tranched credit market and so this must have cost JPM a fortune to tear-up or persuade someone to take it on...

But - Index net notionals have not shifted much - suggesting the IG9 long (at least in part) is still on (or more likely hedged as we note below).

5. Here, by way of example is the mezzanine tranche of the index (the 3-7% tranche) which jumped from 20% upfront to 31% upfront in the last few weeks. If we adjust for deltas and add in the equity and other less senior tranches to the Whale's tail-risk position (and adjust for the index shift) since being short one part of the capital structure is similar to being long everything else against an index short - we guesstimate the 10% of notional cost this last (or around $5.5bn) is not far off - especially given the illiquidity...


Which leaves an $8bn loss - though the last few weeks has seen indices all over the place grabbed as basis hedges so that the entire index position didn't flood the market. By way of example, IG18 notionals have soared recently...


So, in summary, it appears that the CDS data confirms what we suspected.

  • A large (~$120bn) tail-risk tranche credit hedge was placed.
  • The hedging of that hedge became very onerous but surprisingly profitable as markets rallied day after day with no give-back.
  • This led to a greedy trader lifting some of the original tranche (and the HY short side) and leaving himself much more naked long to the market into LTRO2 - which marked the top. Losses escalated through April (~$2.5bn or so).
  • Dimon went public (with some of the details).
  • Last week, the rest of the tranche was dumped (we suspect) at a large cost (perhaps ~$5.5bn) leaving, we suspect...
  • A potential ~$8bn loss and a heavy IG9 long credit position hedged (with major basis risk - difference in dynamics between the legs of the trade and the hedge) by various other liquid positions including shorts in HYG, JNK, IG18, and HY18 (and we would suspect equity/financials too).

Data: CMA, Barclays, and DTCC

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veyron's picture

so if JPM is the whale, who is captain Ahab?

UP Forester's picture

Maybe it'll take a Bass to harpoon a Whale....

Oh regional Indian's picture


Just Playing Monopoly. Only, they mean it and like it like that. 

Oh, and they have a lock on Get out Of Jail Free cards.

And their Grand-pappy bought Union Station AND PickyoDillydally. We on the other hand ARE the circus.

Even 8B is nuthing. It's the Change we were prepared to lose. Lose Change.




Fish Gone Bad's picture

8 billion is pretty much an uncountable number for most peoples lifetimes ...

Oh regional Indian's picture

Precisely FGB, which puts any trillion in deep space category. Which is my point. 



candyman's picture

F'in excellent piece. thanks for the tip.

Hopeless for Change's picture

Heads will roll for this.  Oh, did I say heads?  I meant eyes.  Eyes will roll.

Yamaha's picture

Wait until Congress reads this nice evaluation............

RECISION's picture


Ohh, what was that going by overhead...?

(I wouldn't hold my breath)

zhandax's picture

Wait until Congress reads this nice evaluation............

You really think anyone in congress understands this evaluation?

Carl Spackler's picture

NOBODY in Congress or on their staffs understands this strategy and the tactics Tyler deduced from the data.

Even though the whale was playing the behavioral possibilities or changes in spreads between various moving parts/indices (takes a little more horsepower or experience to grasp dynamics), Congress wouldn't understand it if it involved a static instrument.

Dimon probably didn't understand it until significant explanation, discussion, and clarification by "the Cruz missile."


Bananamerican's picture

"HEARINGS will be HELD Muthafucka!!!!......Lotsa......HEARINGS on them ole, loaf-a-bread headed niggys!"

zhandax's picture

Already called for by my in-state douchebag who I would dearly love to replace.  The guy who has enough wall street money in his pocket that he won't hear a thing....

taniquetil's picture

Dear Zero Hedge,

Next time you post something that we blatantly rip off of because we can't understand the regulation we wrote (or just plain didn't read it), please include the word "Speculator" in as many instances as possible. We don't know what hedges are and certainly don't understand the credit market but the word "speculator" sounds sufficiently scary and makes great soundbites for TV. In between JP Morgan and Facebook we are trying to make it illegal for companies to lose money and make it a jail-able offense for stocks to go down, so being able to go on TV on shout about speculators ruining the economy is crucial.



Carl Levin

Elizabeth Warren

Max Fischer's picture



You're a fucking idiot... another Republican super-pig trying to protect Wall Street's ability to fleece the little guy by down-playing the role of speculators with their hundreds of billions in casino chips and 40X leverage.  Only a Starbucks-fetching summer intern at GSCI could write something that panders to speculators with such a sophomoric tone. I'm not anti-speculation per se, but their involvement in the food and oil "super spike" from 2005-08 is undeniable.  For you to make a mockery of their involvement makes you either 1) ignorant, or 2) conflicted in your interests.

Between 2003 and 2008, the amount of speculative money that poured into the commodity complex rose from ~$13B to over $300B.  Only a naive Wall Street bootlicker would argue that such a massive influx of casino chips betting on the necessities of life is.... meaningless? ... worthy of mockery?   Idiot.    

Elizabeth Warren is one of only a few people around Washington who's actually calling for the resignation of Jamie Dimon from his position at the Federal Reserve Bank of NY. Currently, he's on the Management and Budget Committee for the New York Fed which, according to their own admission of responsibilities, determines "the framework for compensation of the Bank's senior executives." * Don't you think it's a bit of a conflict of interest for Mr Dimon to be in charge of his regulator's paycheck, especially when his bank is front and center in many of the regulatory policies currently being debated?

Of all the conversations and topics regarding Wall Street corruption and Washington malfeasance, for you to attack E Warren the same day she calls for J Dimon's resignation proves you're just another right-wing super-pig.




cheesewizz's picture

So.... The fox is guarding the hen house.

So...The hens are buying guns.

geoffb's picture

"Only a naive Wall Street bootlicker would argue that such a massive influx of casino chips betting on the necessities of life is.... meaningless?" I think you mean Barney Frank.

Last I checked it was the lib's who are in the back pocket of the bankers. Seriously, defending anyone in the regulatory halls of this country is misanthropic at this point.

HoofHearted's picture

You are so close to being on point, Max Fischer, but you just don't go that last, necessary one step further...

...why was everyone piling into the commodities complex? What was the reason that "evil speculators" saw the potential to make a few bucks on commodities? If you can get past your righteous indignation against speculators and look at what has caused that move, then you may come to the same conclusion that many of us have. It's time for Constitutional money and an eventual abolition of the Fed. If a currency could be real money (i.e. include the "store of value" in its purpose) then we might not have so many speculators.

As the Yogi once put it, "A nickel ain't worth a dime any more." And as Kyle Bass is implying, "It soon will be."

blunderdog's picture

I don't have anything against speculators, but I wonder:

Why is it that having some money has to automatically give the owner the ability to get MORE money?

Seems to me that right there is the real source of the "ponzi" and the "infinite growth" conundrum.  This isn't intended as a specific question about interest or yield, but a more general question about the philosophical basis for capitalism.

I'm inclined to say that it's a self-defeating requirement, but maybe someone smarter can model it all out and we can somehow keep the "money = income generator" concept without the "catastrophic collapse" that seems to come with every currency regime.

fuu's picture

All that freshly printed hot money made the deflationistas look like idiots.

Seize Mars's picture

"I'm not anti-speculation per se, but their involvement in the food and oil "super spike" from 2005-08 is undeniable."

M'kay. And the printing of trillions of new money had nothing - absolutley nothing - to do with a price rise.


chump666's picture

That was f*cking awesome ZH.

it shows the market is still heavy and reluctant to go long on risk with rallies (bounces) getting stopped very quickly.  So after the EU summit, markets/credit/equities could shift into rally mode or bounce then sell rapidly. 

The last few days of a short squeeze has been pitiful particularly Asia.

WonderDawg's picture

Looks like the Asia short squeeze is over.

chump666's picture

Yeah it's kinda telling how technically broken the markets are, that even Asia couldn't muster a decent short squeeze.  There is a relief rally due, but it may be a very crappy money shot (my porn metaphor).  Everything looks weak and defeated.  World Bank just warned Asia on inflation, so it the Fed does a QE3 to get this market going it's got to be trillion +++ large, then Asia gets hit with food/oil inflation, Europe chaos etc

Totally FUBAR from all angles. 

JupiterAndBeyond's picture

Lucky for JPM, they can dip into the Fed's pockets whenever they need...unlike the rest of us muppets.

MayerRothschild's picture

'us muppets?'  I won't be fist fucked in the ass for dollars*


*gold only

JupiterAndBeyond's picture

I should have expected this from a Rothschild...

chump666's picture

That is actually a good point, Wall Street controls the Fed

Tuco Benedicto Pacifico Juan Maria Ramirez's picture


Best Guess Fed ownership:


The top 4 banks:  B of A, JP Morgan Chase, Citigroup & Wells Fargo-Wachovia control roughly 54% of the stock of the Federal Reserve Bank.  The top 10 banks, including Goldman Sachs, HSBC and the Bank of New York control roughly 70% of the stock.



LeonardoFibonacci's picture

Can you say Jamie's got a gun?  Sure you can!

Freddie's picture

That dogsh*t "stock" Facebook would have been a ssfer investment.

barliman's picture


Tyler ...

Where's Bruno? Not a facetious question since he always eschewed the public eye ... perhaps he learned Jamie Dimon wasn't being friendly when he said, "What are we going to do with you? Chum."


UP Forester's picture

Bruno is currently pumping his new movie, "The Dictator, or How I Learned to Stop Worrying and Love the Derivative Bomb."

taniquetil's picture

Hey, it worked for Nick Leeson

Mercury's picture

The charts below tell the story of an early unwind of the Fed-induced-failure tail-risk hedge but an arrogant momentum chaser that left the massive long credit index position (hedge of a hedge) that had been the cause of dislocations in the Index-arb business (that other media entities have focused on) flapping into and after LTRO2 into around early-to-mid April (when we are sure Jamie got the call).

This is starting to sound like PrimeX... another index, the derivatives of which, appear to be more liquid than the constituent, underlying securities. Sounds unworkable as a large position hedge to me.

There was probably a better, simpler…but more expensive way to put on the original hedge that isn’t looking so expensive now.

LetThemEatCake's picture

Thanks, Tyler, for working it all out and explaining it in terms Muppets like I can understand.

q99x2's picture

Ahab is not the captain it is the Bernank. When the morgue commits these acts of TBTF Jamie goes to the Bernank. The Bernank then cuts the benefits to the US elderly, kills them, and gives the money to the morgue.

El Oregonian's picture

... the morgue tells her. "nuttin poysonal Granny, It's jus biznuz..."

Some Bloke's picture

I'm useless at stock trading and in my career have only ever lost about $3 - 4,000 in total, and I lose sleep about that when I compare myself to these experts can lose so much more money in far more complicated schemes. 

For mine, they deserve the mega bucks they earn, so carry on...

barliman's picture


Now, don't belittle yourself ...

... I am sure you could lose just as much money as they do, given the opportunity.


Deo vindice's picture

JPM has more paper than there is silver. About 100 times more.

Nothing will crash until a major (and I mean major) player decides they want to take delivery of physical, and there isn't enough to cover.

francis_sawyer's picture

Why bother ever taking physical and ending the game for good so long as you can find counterparties who are willing to take cash settlements?

That would be like Rick Blaine telling everyone he had a button that controlled the roulette wheel so they might as well just give him all their money right now...

asteroids's picture

I wonder what Buffet thinks of this eh?