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Has JPMorgan Already Unwound Its Losing Trade?
On Thursday night, after it became clear that JPM has lost at least $2 billion on what is most likely an IG9 Index skew (Index less Intrinsics) trade gone horribly wrong, we first predicted (and promptly were piggybacked on by other various financial blogs) that based on various factors, there is about $3 billion more in the pain trade coming in JPM's general direction, once IG9 blows out to catch up to a fair value not supported by JPM(artingale's) infinitely backstopped prop desk. Sure enough, by closing on Friday, IG9 (and the entire IG curve), had blown out wider, by a whopping 10 basis points: one of the biggest intraday moves in nearly a year. In P&L terms, by close of Friday, all else equal, JPM had lost another $2-3 billion on the same trade it had lost over $2 billion since the beginning of April. We expect to hear confirmation of this shortly. Which however brings another question: has JPM closed out its losing trade, or is the entire move in the index (and to a far less extent in the intrinsics) due to hedge funds who have piggybacked on the "crush JPM" trade? The truth is we don't know, and until we get the latest weekly DTCC data on CDS notional outstanding we won't know. However, our gut feeling is that it would have been virtually impossible for JPM to lift every single offer in unwinding a $100+ billion notional position without sending the entire IG curve multiples wider. Which is why keep a close eye on the IG9 10 Year skew - this is where, as ZH first noted, the action is. If the skew soars, it is likely that the runaway train will keep going and going, until JPM issues a formal announcement that the firm is fully out of the trade, together with a final tally of its losses, which will probably be double the reported loss as of Thursday. At which point IG9/18 will see an epic ripfest as those short risk will scramble to cover.
As the chart below shows, as of Friday, the index was still 7 bps rich to intrinsic, however the spread collapsed by nearly 50% from the day before. If and when the skew goes positive, would be our all clear to get out of dodge. Until then, JPM will likely see far more pain, even if, technically, it won't, following rumors its entire London CIO desk may be now in jeopardy, meaning it will be up to the middle office to unwind, at an even greater loss to the firm. And compounding the issue will be the general risk off nature in capital markets over the next few days, following a plethora of European sovereign bonds, and, oh, the little issue of the Eurozone potentially falling apart in a few weeks. All of which will likely see the continued widening in various IG points, until JPM issues at least some more color on its current involvement in the trade.
IG9 - 10 Year Skew: ripfest, but still a ways to go:
Someone else who believes that the trade is now over, is Peter Tchir. We don't quite agree, but we do believe IG9 (and 18 by proxy) longs should be careful - very soon covering an IG long CDS position may well be the pain trade.
From Peter Tchir of TF Market Advisors
The Coolest Trade I Ever Saw!
On the coolest trade I ever witnessed, I was an unwitting participant. In the end, I don’t know if any of it is true, but this is the story I saw and was a part of, and the firm’s P&L seemed to back it up.
I only mention it now, because I can’t help but think Jamie Dimon is pulling something similar. With Sarbanes Oxley and everything else, I’m not sure he could be, but there is a nagging doubt in my mind about “piling on” being the right trade.
I also can’t help but remember back in 2008, where Citadel had a conference call. That was unusual enough. More unusual was how easy it was to get the number. Ken went on about the basis (long corporate bonds vs short CDS). I remember liking the basis at that time, even had on a tiny bit, but I wanted to buy because I figured it was at ridiculous levels, the funding the Fed was supplying would help the market, and by the time Ken was so openly talking about it, you had to know the unwind was almost over.
So, anyways the trade I remember as the coolest trade was way back in the early 2000’s. I was at DB at the time doing some HY CDS, Synthetic CLO’s, Total Return Swaps and a few other things that most people hate. But the big story at the time was talk that the government would stop issuing the long bond.
The bond was going up almost daily. There was talk about the scarcity and that it could go a lot higher in price. The rumor was that DB was short. It started as a small rumor, but got around. One morning, the long bond opened up more than a point. It kept grinding higher. It didn’t matter who you were at DB, you were being asked by the street, by clients, by competitors about the trade. Everyone thought DB was short and getting killed. The size was supposedly large (by the standards of the day which are a fraction of what they are now). I remember being nervous about my bonus.
What the heck was going on?
Then it happened. Edson Mitchell or his assistant came out of “mahogany” row and called the head of rates (who oversaw treasuries) off the desk. Myself and countless others were immediately on the phone and Bloomberg messages telling people what just happened. Holy cr*p this must be bad. The head of rates was called off the desk. That NEVER happens. And it was not to celebrate. Wow. The long bond spiked further, I think at one point it was up over 3 points – a huge move. The rumors of losses were growing by the second. People were wondering if they should trade with DB. The “usual histrionics” that were blowing the situation way out of all proportion.
According to legend, and the P&L seems to have backed it up, the rates desk was actually LONG treasuries. That extra 2 point gap made 100’s of millions of dollars for the firm. Whether they had ever been short, I don’t know, but they had turned the position and were now massively long and profiting from the move. How they didn’t just take the money and be happy I will never know. But to go through the charade of calling the head of trading off the desk and causing an immediate spike that they sold into, has to be the single coolest trading thing I’ve ever seen.
Be careful betting against JPM and the trade they allegedly have on and allegedly still need to unwind and might allegedly lose a lot more money on. I’m not saying this is a head fake and I haven’t recommended closing the trades in TFMkts Best Ideas™ that benefit from the unwind, but I really don’t believe, that in spite of Sarbanes Oxley, we are getting the full story, and not possibly being played a bit.
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SUCK IT JPM !!!
i'm sorry guys but this is nothing but propaganda by jp morgan chase, this was sent to the mainstream media immediately and david gregory nbc's national guy was in interviewing dimon immediately, this is part of the beginning of the end game to show we are now going to scold the banks in the end
Propaganda for endgame, huh? So they will start with I'm sorry and end with a pitchfork in the ass?
How's this propaganda for endgame:
http://www.youtube.com/watch?v=iLORNUOSCPE&feature=plcp
Fucking Whoah!....quite the visual clinic!
whoa is right. that was something else...and the comments section...wow.
You know when your being piggy-backed, it doesn't help things if you're the one at the bottom of the pile.
Proof they haven't unwound the trade yet:—
They haven't fired Bruno Iksil yet.
Ya gotta love a good game of Indian poker
From the comments:
This was an outstanding video. Wow. I was a cop for ten years. I felt it. I saw it manifested in others. This is THE? monster, brothers. A new paradigm is coming, the curtain is being pulled back, the guts of the psychological machine laid bare.
"We have met the enemy and it is us."
Any chance this thing gets swapped off balance sheet into a special purpose vehicle until the dust settles?
That was extremely a different view!
Great link. You're no longer drinking Kool Aid are you?
Don't forget your silver bullets because they kill vampires.
JP Morgan is a slimy snake slithered up from the pit. This is exactly the type of thing they would do if they could. The question is simply "Can they?" I hope they get cast back into the fires they came from, but bet against them at your own risk. There was/is an ulterior plan. Beware.
Eh. "The British Banks are the big winners" are they not? I did take note the pound surged on the news that QE was ending in Britain.
JPM now must push against the IG blowup, kinda like they've been shorting silver. It would be hilarious to see them have some more deep trapped positions.
Best way to profit? Short JPM, puts? Any other indirect plays?
Probably too late to short
Way to late to short. It was "only" two billion.
The snap back of an "approved member of the consortium" will force cover, which will grind anyone shorting into the dust...everyone should suspect Dimon himself shorted on the news, before he ever gave the news...lol.
First one in...first one out, don't play their game.
ETF's...FAZ specifically tracking against the Russel Fin as the Bear, it counter option is FAS.
Careful though, X3 ETFs have ripped people apart before, keep stops tight and prepare to fall out of your trade several times. If the shit does hit the fan, they swing around 20% a day.
AGAIN BE CAREFUL, I suggest not using them at all or putting a dime of your money into the market, the game is rigged...don't take the bait.
Hmm possibly ref: http://www.zerohedge.com/news/why-corporate-balance-sheets-just-dont-matter-new-zirp-normal
Or, BTFD!!! Until it doesn't work anymore.
Don't bring an etrade plastic butter knife to a fight vs the Fed's nuclear bomb open market operation.
+1
I have a certain guilty sense of Schadenfreude. It's a drop in the bucket and doesn't make up for JPMs involvement in the MFGlobal debacle, it's a start.
With me, it is freude all the way.
All this while Rome, errr... Athens burn!
Jamie's Lament
Threw this together over the weekend.
A corporate CDS unwind with losses going into a risk averse trading period, with a possible equity crash looming.
JPM will take a bigger hit.
They'll have to cut trades to cover others, it will be messy and chaotic, in fact the bet is that they cut their London position to nothing, job losses etc. All this may lead to the deeper May correction in markets.
Yeah, but where's the cuts coming from, and will it be a scaple or a chainsaw?
probably a chainsaw.
Guillotine.
Just get out of longer maturity bonds and close your hedges. You can indirectly help put the squeeze on jpm
Hey if a milliOn of us do it we could really put the hurt on jpm even if we cant copy the exact trade the hedge funds are doing
Lol I like to feel I am doing my part. This hurts jpm more than buying a few silver coins
When the fuck was Sarbanes Oxley a deterant to any CEO? Pretty lame, but it only makes Peter's quasi-conspiracy theory even more plausible.
It's pretty clear after MF Global that Sarbanes-Oxley doesn't mean shit.
SOX...are they still following that?
Quick, someone check the Feds "other assets" line on their balance sheet.
Interesting, Asian session looking weak even with Reserve releases.
Obviously the biggest move in a yr on Friday combined with JPM disclosure Thursday are related. And people say there is no manipulation in the markets? LOL.
maybe we'll find out that JPM is actually long silver ...
I don't think JPM has any traders THAT rogue....
Holy shite...
If JPM Needed to sell silver to raise the losses to pay... whew...
Forget the truck, grab a train.
yep
So, I begin to wonder......are people being cut loose from JPM for fucking up OR are they jumping from the train before it hits the blown bridge ahead? Inquiring minds want to know.
Bandy - Both. I presuming you are a critical thinker, what would you do...?
Many a time I have jumped ship, all before hitting the bridge that didn't exist. I am a fool for thinking this may not have been the case here. Why, really, have I been made to believe that these people are not faced with the same situations? Perhaps I am foolish, as well.
If they jumped, or were pushed, the thinking is that there is far more than we see. I have been given considerable severence for not stating what became obvious long after I was gone.
" Many a time I have jumped ship, all before hitting the bridge that didn't exist."
Well you were probably exercising good risk management, and that was before TBTF, ZIRP, and Fed bailouts. You would have been proved prescient if the Fed had not turned into the criminal enterprise it has.
These folks "severance" package will be well scrutinized by the media. Dimon will step down within 1 year (quoting spending time w/ family, etc.,,) .
They have made fortunes playing the one side of the TBTF trade. Why should Jamie hang around for all the animus when it all comes down?
His mentor Sandy Weill had perfect timing to bail and leave the stinking pile of opprobrium for someone else after making conservatively $1B (and lets not forget his partner in crime Bob Rubin).
Jamie willl get out of the way of the wrecking ball.
You would have been proved prescient if the Fed had not turned into the criminal enterprise it has.
The Fed has been a criminal enterprise since the day it was conceived.
I have almost been caught in these shitstorms.
The Wrecking Ball crew has a finesse to knock over a wineglass while leaving the rest of the table sans people intact.
If you wanted to survive a mountain runaway, you had two choices. Jump or take a gravel and stone bath on a runaway ramp.
ZH showing once again that it is THE place if you want to know what's happening.
Robert Brusca will present the kindergarten version next week, comprising pasteurized homogenized ZH extracts, stripped of informational content, and presented as original "thoughts". You go, girl.
Brusca is still in the BETA phase of the Fed's/ DOD -- FED twitter posting-algo bot initiated (OPERATION PhD LITE); wait for the 2.0 version... housing prices are sure to hit bottem soon, very, very soon...
Tyler - No worries. JPM has traded out of their "hedge" position. All is good. Full steam ahead.
Oh wait a minute...that means that they are still holding their main position. Making a profit no doubt. gotta love those long synthetic CDO/S's.
A basic tenet of risk management is calcylating the liquidity of one's hoildings. It's all good on the way up in CDOs / CDSs (synthetic or actual contractual paper). It's when the market goes offered and their is no BID ( or Bids quoting $1MM all the way down to 20% of face value) that problems arise.
How does one value their book when they have a $1B book but there is only $5MM bids in the market? Of course the EOD mark to market staff values a $1B book on the last $5MM bid.
Hey what could possibly happen?
Buy Silver and enjoy the ride.
I smell a rebound rally in the Morgue's stock price this week -- once the propaganda machines kicks and the MOMO's try and make some money on false hopium,
So the coolst trade Tchir ever saw was a headfake scam? So the stock market truly is nothing but a poker table. JP Morgan is trying to make people believe it is holding a losing hand while secretly making everyone else bet big, only to lose everything when the cards are flopped and JP holds a straight flush.
My bet is Dimon made a call on Thursday to the Fed letting them know his bank lost more than $10 billion on a trade. A trade that could topple the entire market. Dimon asked the fed for a $50 billionish loan to use in order to bet against the ensuing trade once the news hit. The PR campaign and messy outlook would seem to hamper JP all while a secret bet is made against the prevailing wisdom. When the news that JP's position was actually unwound last Friday hits, the short squeeze will cause a massive rally, a rally JP placed a bet on. The profit made off the trade will be enough to cover all the previous losses and pay back the Fed 100% in less than a week.
Dimon gets his money back, the Fed prevents a market crash, and everyone is happy.
This has been the story since 2008. All losses will be covered, the market will not be allowed to crash, the bets will continue to grow even more irresponsible.
Post BBG revelation of secret Fed loans this moonbat could be right
How sad is it that the scenario you describe is a real possibility. Honesty and integrity are a joke to the cbs running this entire sick casino.
Pimco may be the next beached whale...
Just thought I'd add:
FROZEN CONCENTRATED ORANGE JUICE
God, Trading Places isn't even a comedy anymore. It's a frickin documentary. Which I know has been said many times. Still sad and infuriating.
What is ya, ignorant?
ignant
Love purists
China's Qualified Foreign Institutional Investor (QFII) scheme, which allows some foreign investors in invest in mainland stocks and bonds, will be relaxed so more investors can take part.
And if you still have an empty chamber left after going up against JPM here's your chance to pull that trigger one more time.
You think China is opening up because things look good?
China is the only real opportunity to make a buck left. The next decade will be retail. HK already world leader ref IPO's and thousands of private Chinese companies are all getting their books tidied up ready for their shot.
No doubt they took positions to profit when the news broke. No doubt Uncle Scam is standing by just in case.
tchir makes a very interesting and plausible case about jpm wilyness.....the publicity initiated by dimon is almost like a cia stunt made to draw attention away from a position where the real action is....not sure if the math supports it, but the psychology is quite credible......while i despise dimon i am not sure that he is total imbecile....how do rise to the top of mammon's toady being a total fucktard? it is sad commentary that a firm would be reduced to casino games to make a buck per tchir.
implode/ explode blog noted that they (at the same time of this crap) moved a large some of money into their anti-litigation account as a ruling dealing with mortgages is coming out against them? well, and what else is new
HOW CAN I JUMP IN THIS TRADE TO FEAST OFF JPM
This is what you get when you allow people to make 100's of millions without risking a DIME of their own money.
No one should make that kind of cash unless they can lose IT ALL if they fuck it up.
Encourage good dental habits.
GUYS, I HAVE FOUND 1 USE FOR GOLD - Surrounding a nuclear weapon with suitable materials (such as cobalt or gold) creates a weapon known as a salted bomb. This device can produce exceptionally large quantities of radioactive contamination.
That would be a incredibly dirty weapon.
Be no good to try and raise the Flag on a rubble of a ruined City State that is uninhabitable for 10 thousand years.
Compliments of ADR:
"Just thought I'd add:
FROZEN CONCENTRATED ORANGE JUICE
God, Trading Places isn't even a comedy anymore. It's a frickin documentary. Which I know has been said many times. Still sad and infuriating."
So ... what is it? .... nature or nurture? ... that is the question. Look for Eddie Murphy to make an announcement with JamieD later today
George Box quote: “All theoretical models are wrong, but some are useful.”