How JPM's "Hedge" Blew Up In One Easy Chart

Tyler Durden's picture

It seems every critical-to-stay-relevant talking head and blogger is trying to make sense of, and gain as much airtime discussing, how JPMorgan's CIO unit could have been so 'stupid'. The answer is - they weren't. As we described first here and here - and has now been accepted by the mainstream media as fact (of course we are flattered by the mimicry) - the reason that the hedge got out of control was the massive amount of delta-hedging that Iksil had to do to manage the position as the Fed and ECB crushed the systemic risk out of the system and blew up the correlation assumptions in his models. This is complex to explain but, by way of example, we show a chart of the implied delta of a proxy for the JPM hedge. The lower the delta, the more and more index protection that needs to be sold to maintain a stable hedge - and as is clear, not only did the delta collapse (almost halving in 4 months) but it reached pre-crisis levels which would have been generally unthinkable in the risk scenarios - given the backdrop of reality. Whether Iksil arrogantly enjoyed ignored the cornering of the IG9 index market and the momentum and P&L he was relishing in is a different matter but to comprehend the forced selling protection pressure he was under, this chart is all you need to understand...

Source: Morgan Stanley

Example - if the tranche notional was $100bn (we suspect it was more given that it was a tail-risk hedge for JPM's aggregate book), then the shift from Q4 2011 to end Q1 2012 would have forced Iksil to sell over $30bn IG9 protection alone (as the delta dropped from over 0.7x to under 0.4x). The trend was so strong that there is little wonder that day after day we saw the IG9 skew (the spread between the technically-rich-and-under-pressure index and the trading-on-fundamentals intrinsics or single-names) widen massively - even in the face of an almost ubiquitous (no it wasn't just Weinstein) knowledge of the discrepancy and attempts to arb the difference.

While greed and avarice were likely strong drivers that blind-folded Iksil and his colleagues to the fact that they were getting too big and that the position was out of control, it remains fact that it was a combination of the Fed/ECB's actions to squelch systemic risk entirely and a total reliance on models that is now bleeding to every other credit index and just as we said - leading to increased losses at JPM.

What is more worrying for them now - is that with systemic risk re-appearing, deltas are rising AND that means that the models will be screaming to unwind the sold protection positions even more aggressively. So as the market rallied they bought more and more and with the market selling off, they are forced to sell more and more - not a fun position to be in - and we suspect unwinding the original tranche deal will be practically impossible, given a lack of liquidity in tranche land in the last week. 

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battle axe's picture

Another easy chart is just a straight arrow down, Let the squeeze continue.....


If the "hedge" blew up, must mean that their directional bet was a big winner.  Oh wait.....

RacerX's picture

I think it was the "new" kind of hedge--the one directional kind.

RacerX's picture

Ah I see the JPM Organ mole must be lurking. THanks for all the "-1"s.. lol.

ps: Your "moving boxes" will be arriving soon.

Ahmeexnal's picture

JPig got blowtorched, like most shorts.

Cpl Hicks's picture

I'se gonna start me up a CORNROW fund.

My first bet will be on going long on Barry.

Ahmeexnal's picture

While europe burns, Merkel gives herself A SALARY INCREASE!!!

Merkel, her ministers and their parliamentary secretaries of state will see their wages rise in three stages between now and August 2013, until they all get 5.7 percent more. It is the first pay raise that the German cabinet has taken in twelve years


earleflorida's picture

Yep, and the U.S. Gov't hands out $0.5 Billion in bonuses...

Darth..Putter's picture

Just a touch of the ole inflation bug.

GetZeeGold's picture



Let me tell you what really happened. Usually when I go to bed, I have milk and cookies. And One night I had some low-fat milk and some pasteurized, And I mixed them together. And I dipped my cookie and the shit blew up. - Richard Pryor


Shitters_Full's picture

Q: What's this?

[lights match, moves it quickly from one side to the other]

A: Richard Pryor runnin' down the street

5880's picture

It was, they made 1b on it and loss 2b on the hedge (overhedge)

They made tons buying AAA at a discount 08-09

pkea's picture

i still don't get why iksil didn't see it coming(he didn't understand the consequences of his position's size and the ecb and the fed's policies and their consequences for his positions??? even I did and predicted that he will choke up on the size of their positions:) he either got completely lazy(unlikely) or there is something more to it....

Bollixed's picture

"i still don't get why iksil didn't see it coming"

Momentum, it's the ultimate bitch slapper...

earleflorida's picture

Yeah, pure unadulterated avarice, narcissism, and a whole lot of hubris,... topped-off by Dimons' 'sinecure?' director's seat on the [#1 of 3 seats] Federal Reserve Bank #1 Bank of NY board!

pkea's picture

and the other something to this story is that most likely he acted on orders from the tptb (who are stupid and don't get delta and the consequences of proping up markets) 

TPTB's picture

 This graph reminds me that I have to go to the horse race to fleece some drunken gamblers!


jus_lite_reading's picture

What's that burning? Oh the derivatives market!! LMAO I said three weeks ago that margin calls be a comin'

Ya'll didn't know that the "P" in JP Morgan stands for Ponzi, didn't ya'll?

Ya'll ain't seen nuttin yet!!

El Oregonian's picture

JPM = Just Print More. Oh wait, their not the Fed....

GetZeeGold's picture

JPM = Just Physical Metal...

Dr. Richard Head's picture

Make no mistake about it, but Jamie "I'll Fuck You In the Ass for A Dollar" Dimon is on the Board of Directors of the NY Branch of the Fed. -

Class A Board of Directors - The Asshole Class


Al Huxley's picture

Actually, they pretty much are the FED.

resurger's picture

But that does not compare with the joy we had when Greece defaulted, ithink you posted the CDS Trigger event when it was unofficial..

and then Kaboom the market rallied 10%.

all this ponzi will help MF Morgan to unwind the position, once the unwind is done, Greenshoots!

oh! Facebook tomorrow right, did you see that you can buy FB certificates that you own stock hahahaha! i kid you not, it was on CNBC today

jus_lite_reading's picture

Ahhh yes, the soft default made as soft as a bed of feathers by liars covering over their lies with more lies... they moved the chess pieces into place so that the default would seem like a non-event and that the promise of more ponzi would be injected into the global ponzi if anything would go wrong... too bad because they started the domino effect and its coming back quick. The "little people" are paying for their mistakes...

Oh Farcebook... well, I hear they are raising more stock than before 25% more (I assume to cover the "taxes") for the insiders of course and the underwriters... with one company after another pulling out of ads on FB, one should consider how much longer that model will last. Snake oil prospectus says there is no better time to buy Farcebook then RIGHT NOW... 


roccman's picture

$69,998,000,000,000.00 to go

tocointhephrase's picture


Dr. Richard Head's picture

And so it begins -,0,577104.story

Good old Max Keiser.  I hope to see that man during one of his stops here in Amerika.  I would love to just shake his hand, as well as Stacey's.

Dingleberry's picture

so how much is left for JPM to unload? Can hedgies naked short the tranch like JPM does silver?

Manthong's picture

What goes around..

Doubleguns's picture

So when do they sell the silver shorts to help cover this. Or are they going to loose more ass on that one.

Dr. Richard Head's picture

Jamie Dimon is following you and down voting you apparently. 

LULZBank's picture

Naah, me thinks the London Whale lost the job and is bored nowadays.

Nobody For President's picture

This shit makes my head hurt. But, as I get it, Jamie and Z are keeping the Whale around for awhile to help unwind the trades, 'cause he's the only sob in the CIO that knows where all the shit is buried. He's apparently is also the only JPM sob that does not have a photo floating about in the world. I don't think somebody running that scared has time to be bored.

slewie the pi-rat's picture

the fall of achillesMacRis!

(i can't help it!  it is such a GREAT name! i wonder what his avatar looks like?)

Ted Baker's picture


LMAOLORI's picture

JPM $100 BILLION on the line???? WTH

All of this seems to make sense, but still does not address the question as to how a $2 billion+ loss got generated so quickly. Well, as industry insiders are now speculating, the size of JPM’s exposure to this index was somewhere in the vicinity of $100 billion.




JPMorgan's future losses at the mercy of an obscure index




JPMorgan’s Specific Trades Weren’t Monitored Excerpt

Arthur Wilmarth, a law professor specializing in banking and financial regulation at George Washington University, said the JPMorgan incident raises questions about how closely regulators are watching the biggest banks.

I would imagine the only reason the FBI is investigating is because obama and soro's had money in JPM


GeneMarchbanks's picture

Shouldn't the headline read: How JPM's "Hedge" is Blowing Up In One Easy Chart

ArrestBobRubin's picture

By now Bruno's hiding out in Juno. Or someplace similar. If  he's not already "on ice".

The guy knows way too much to last very long.  If I were an ex-whale for Jamie Dimon's very own pet scam, I'd be very sure my life insurance premiums are paid up.


blunderdog's picture

Having worked for several companies during periods of contraction, whenever I see stuff like this I find myself wondering if they didn't just happen to fire the only guy who was paying attention.

"Clean out your desk and go home, John."
"Sure, do you want me to give someone a run-down of the important stuff I've been working on?"
"No, that's ok, we'll take care of all that."

battle axe's picture

Half of the CIO office didn't understand this trade, 

ArrestBobRubin's picture

Want another good laugh? BAC is up today.