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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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Thu, 05/17/2012 - 10:56 | 2435507 battle axe
battle axe's picture

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

Thu, 05/17/2012 - 10:59 | 2435530 SHEEPFUKKER

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

Thu, 05/17/2012 - 11:03 | 2435552 RacerX
RacerX's picture

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

Thu, 05/17/2012 - 11:10 | 2435595 Quinvarius
Quinvarius's picture

A yo Dawg meme to sum it all up:


Thu, 05/17/2012 - 11:19 | 2435623 RacerX
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.

Thu, 05/17/2012 - 11:20 | 2435653 Ahmeexnal
Ahmeexnal's picture

JPig got blowtorched, like most shorts.

Thu, 05/17/2012 - 13:08 | 2436133 Cpl Hicks
Cpl Hicks's picture

I'se gonna start me up a CORNROW fund.

My first bet will be on going long on Barry.

Thu, 05/17/2012 - 11:12 | 2435599 Ahmeexnal
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


Thu, 05/17/2012 - 11:22 | 2435658 earleflorida
earleflorida's picture

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

Thu, 05/17/2012 - 11:58 | 2435827 Darth..Putter
Darth..Putter's picture

Just a touch of the ole inflation bug.

Thu, 05/17/2012 - 11:04 | 2435560 GetZeeGold
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


Thu, 05/17/2012 - 11:20 | 2435650 Shitters_Full
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

Thu, 05/17/2012 - 11:58 | 2435828 resurger
resurger's picture


Thu, 05/17/2012 - 11:08 | 2435582 5880
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

Thu, 05/17/2012 - 11:19 | 2435619 pkea
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....

Thu, 05/17/2012 - 11:29 | 2435696 Bollixed
Bollixed's picture

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

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

Thu, 05/17/2012 - 11:41 | 2435750 earleflorida
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!

Thu, 05/17/2012 - 11:48 | 2435788 pkea
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) 

Thu, 05/17/2012 - 12:12 | 2435682 TPTB
TPTB's picture

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


Thu, 05/17/2012 - 10:58 | 2435520 jus_lite_reading
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!!

Thu, 05/17/2012 - 11:00 | 2435534 Dr. Richard Head
Dr. Richard Head's picture

JPM = Just Ponzi Math

Thu, 05/17/2012 - 11:10 | 2435598 El Oregonian
El Oregonian's picture

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

Thu, 05/17/2012 - 11:14 | 2435614 GetZeeGold
GetZeeGold's picture

JPM = Just Physical Metal...

Thu, 05/17/2012 - 11:21 | 2435655 tocointhephrase
tocointhephrase's picture

Just Plunder More

Thu, 05/17/2012 - 11:16 | 2435620 Dr. Richard Head
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


Thu, 05/17/2012 - 11:50 | 2435799 Al Huxley
Al Huxley's picture

Actually, they pretty much are the FED.

Thu, 05/17/2012 - 11:49 | 2435796 resurger
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

Thu, 05/17/2012 - 12:11 | 2435865 jus_lite_reading
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... 


Thu, 05/17/2012 - 12:39 | 2435995 resurger
resurger's picture



Thu, 05/17/2012 - 10:59 | 2435531 roccman
roccman's picture

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

Thu, 05/17/2012 - 11:01 | 2435539 tocointhephrase
tocointhephrase's picture


Thu, 05/17/2012 - 11:05 | 2435562 Dr. Richard Head
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.

Thu, 05/17/2012 - 11:01 | 2435540 Dingleberry
Dingleberry's picture

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

Thu, 05/17/2012 - 11:01 | 2435542 Manthong
Manthong's picture

What goes around..

Thu, 05/17/2012 - 11:02 | 2435545 Doubleguns
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.

Thu, 05/17/2012 - 11:06 | 2435565 Dr. Richard Head
Dr. Richard Head's picture

Jamie Dimon is following you and down voting you apparently. 

Thu, 05/17/2012 - 11:23 | 2435666 LULZBank
LULZBank's picture

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

Thu, 05/17/2012 - 12:14 | 2435870 Nobody For President
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.

Thu, 05/17/2012 - 11:03 | 2435549 slewie the pi-rat
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?)

Thu, 05/17/2012 - 11:03 | 2435551 Ted Baker
Ted Baker's picture


Thu, 05/17/2012 - 11:13 | 2435611 resurger
resurger's picture

VaR number my ass...

Thu, 05/17/2012 - 11:04 | 2435558 LMAOLORI
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


Thu, 05/17/2012 - 11:10 | 2435586 GeneMarchbanks
GeneMarchbanks's picture

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

Thu, 05/17/2012 - 11:18 | 2435632 ArrestBobRubin
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.


Thu, 05/17/2012 - 11:25 | 2435676 blunderdog
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."

Thu, 05/17/2012 - 13:04 | 2436113 battle axe
battle axe's picture

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

Thu, 05/17/2012 - 11:05 | 2435563 ArrestBobRubin
ArrestBobRubin's picture

Want another good laugh? BAC is up today.

Thu, 05/17/2012 - 11:08 | 2435587 Dr. Richard Head
Dr. Richard Head's picture

If Viagara can give old farts erections, Bernanke can give BAC one too.

Thu, 05/17/2012 - 11:37 | 2435730 WonderDawg
WonderDawg's picture

For now. Plenty of trading left in the day.

Thu, 05/17/2012 - 12:19 | 2435896 Nobody For President
Nobody For President's picture

You spoke too soon. BAC down at moment. Wait till close...

Thu, 05/17/2012 - 11:06 | 2435569 Imminent Collapse
Imminent Collapse's picture

This stuff is so complicated that I can't believe that there is a whole universe of traders out there that understand it and will actually honor their trades and pay up when things go South.  What mechanisms are in place to enforce settlement?

Thu, 05/17/2012 - 11:15 | 2435622 Rainman
Rainman's picture

The USA taxpayer

Thu, 05/17/2012 - 11:08 | 2435588 Hedgetard55
Hedgetard55's picture

So, somehow Ben killed the volatility in the hedging instrument so that it did not move as much as it used to, thus the dude had to buy a ton more, and then boom, it went the other way and killed him. Is that about right?

Thu, 05/17/2012 - 11:20 | 2435651 Rainman
Rainman's picture

The short answer is risk modeling ain't worth a shit !

Thu, 05/17/2012 - 12:57 | 2436078 i love cholas
i love cholas's picture

Modeling is for geeks.

Thu, 05/17/2012 - 11:09 | 2435592 PaperBear
PaperBear's picture

How’s that systemic risk looking now, Mr. Bernanke ?

Thu, 05/17/2012 - 11:31 | 2435597 Mercury
Mercury's picture

What tail risk are they ultimately trying to hedge? - that the government won't consider them TBTF if TSHTF?

Besides, any systemic hedge that is cheap, long dated and involves illiquid securites seems to me like it would also involve very high counterparty risk during a systemic shock event.  How do you model that?

Maybe equity protection is expensive ("tweet" #4) because the market has much higher confidence that it will actually work.

Has this "Super Senior Tranche" actually been around (and traded) since mid-'06 or has someone just modeled it backwards to make it look legit?

Thu, 05/17/2012 - 11:12 | 2435605 Chippewa Partners
Chippewa Partners's picture

The Wall Street Journal article this morning had some detailed numbers on this guy.  Somebody was chirping from the inside.  The WHALE or CAVEMAN had done well for Jamie.   Should have been enuf to get him a corner office and on the Board. 

Thu, 05/17/2012 - 11:12 | 2435606 resurger
resurger's picture

who was the "Other Big Whale" on the other side of the trade?


Who made most of the 2bn?

Thu, 05/17/2012 - 11:18 | 2435634 haskelslocal
haskelslocal's picture

Great question I've asked and wondered as well. I suppose the reason it's hidden/ignored is that once you know there's two parties, it takes away the drama of the loss and turns the focus to the "should we or shouldn't we" allow this type of prop.

Thu, 05/17/2012 - 11:39 | 2435732 resurger
resurger's picture

This is is just fucking crazy, if you are really in Risk Managment how do you run an open position worth 100bn?!! and they do look at Monte Carloooo00 which generates the maximum loss based on some multiple/random future crises scenarios... What kind of Risk Management is that, how the fuck do they sleep at night?!!! Do these guys hedge back to back whenever they sell their shit? I bet you they dont have a "matched book" in anything they sell or buy?!

How audit firms audit these guys? or Arthur Anderson model.

VaR is so passe', i dont blame Bruno Iksil, he has nothing to do with this, becuase someone has allowed him to do this, and it was Risk or someone who is doing "God's Work" Bruno is just a tool.

the Taxpayer can always pay for the losses...I hope they go bankrupt for what the did to the poor farmers.


Thu, 05/17/2012 - 11:19 | 2435644 ArrestBobRubin
ArrestBobRubin's picture

It was Blythe.... we turned her... Shhhh!

Thu, 05/17/2012 - 11:17 | 2435628 erheault
erheault's picture

I would imagine the best is yet to come there is too many snakes to keep in one box. once the lid is lifted it will be fun to watch.

Thu, 05/17/2012 - 11:19 | 2435643 WyMi
WyMi's picture

It's a zero sum game. $2-3B yin is a $2-3B yang. I bet the Fed needed a bit of reserve/payback for the next Bennie Special.

Waiting for the rumour of the announcement!

Thu, 05/17/2012 - 11:20 | 2435648 tahoebumsmith
tahoebumsmith's picture

There is nearly 700 TRILLION DOLLARS of derivative exposure out there globally. This loss will not even get an honorable mention in the history books when the entire synthetic bubble bursts. It may be considered the spark that lit the fuse by some however the fuse was lit some time ago.

Thu, 05/17/2012 - 11:20 | 2435649 hidingfromhelis
hidingfromhelis's picture

I take great satisfaction that one of the biggest beneficiaries of manipulated markets and suppressed fundamentals just got bitten in the ass by manipulated markets and suppressed fundamentals.

Thu, 05/17/2012 - 12:30 | 2435951 disabledvet
disabledvet's picture

This is what I find interesting. Is this the result of failing to see rates come strongly in at the long end? In other words "what animal is this tail connected to again?"

Thu, 05/17/2012 - 11:22 | 2435661 midgetrannyporn
midgetrannyporn's picture

They will steal it back with interest.

Thu, 05/17/2012 - 11:26 | 2435685 doomandbloom
doomandbloom's picture

Bruno was assured that negative news would soon pick up and tail risk would be back!


i dont for a moment believe, he would take those kind of bets without some tacit approval.

Thu, 05/17/2012 - 12:19 | 2435897 reload
reload's picture

"i dont for a moment believe, he would take those kind of bets without some tacit approval."

Exactly - a classic prop blow up. It would have been glory and $$ all round if it worked out, but hey, if not a few scapegoats will be found.

Bruno knew the score and no doubt enjoyed his day in the sun. Now he needs to keep his head down and keep quiet. Soon enough he will be back in very gainful employment. He will have proved he knows the rules and can be trusted again to work his new bosses corner and take the blame if it goes wrong.

JPM are not too squeamish about hiring traders who have suddenly left their previous firms with huge losses. Its all part of the game.

Thu, 05/17/2012 - 13:28 | 2436221 Seer
Seer's picture

"Soon enough he will be back in very gainful employment."

I'm thinking not...  He's been painted for slaughter.  Does anyone think that the FBI being involved isn't a sign that a sacrifice is going to be made?  Like others have mentioned, I think that the "Whale" is going to end up swimming with the fishes...

Thu, 05/17/2012 - 11:28 | 2435694 Capitalist
Capitalist's picture

Delta hedging... blowing up your portfolio since 1989

Thu, 05/17/2012 - 11:30 | 2435698 johnjkiii
johnjkiii's picture

This is a lot of gibberish to go through to get to: VaR & CoVaR don't work! Never really did even though the tail risk got to less than 1%! It never will work because the assumptions are all bulls*^t as JPM still sit on $70 or so Trill of allegedly hedged derivatives. This eff-up was a mere rounding error. An "i" somewhere in their computer system has still to be dotted. This was only a warning, the next one will blow Ben up with it.

Thu, 05/17/2012 - 22:38 | 2438260 oldman
oldman's picture


Hey john,

I don't understand all of gibberish, especially tha VaR&CoVaR, but this seems too easy to me.

I mean, why ddoes Dimon admit a Two bill loss when he knows a lot more is coming---You couldn't even unwind two bills worth of of fucking cotton on calendars spreads for less than an assumed +or - 5%, and we know it has to be bigger than 40 bills---maybe 500 bills-----How can these dudes play in so big in illiquid markets? And how are they ever going to unwind 70 or 700 trill?

The illiquidity is what scares me all of CBs together couldn't suck that much in.

Or am I wrong-------?                               om


Thu, 05/17/2012 - 11:35 | 2435719 Zen Bernanke
Zen Bernanke's picture

So what you're saying is the Fed, who initially bailed out JPM, ultimately buries them with their misguided monetary policy.   Don't you just love irony. 

Thu, 05/17/2012 - 11:37 | 2435734 oldman
oldman's picture

Thanks for this piece.
This is affecting all of the other trades JPM has on---how ARE they going to unwind this shit? No one will want the other side of any trade because it seems obvious that there is no way to stabilize JPM. It looks like the fed is on the hook or it all comes a'tumblin down.
Fascinating to watch!
Thanks again for the clearest picture I have had of this om

Thu, 05/17/2012 - 11:45 | 2435768 haskelslocal
haskelslocal's picture

Similar to the Mark-to-Market fiasco of 2009? What is all the hard to liquidate junk worth? Will the FED then also try to absorb this as well?

Thu, 05/17/2012 - 22:28 | 2438230 oldman
oldman's picture


Damn, Hask,

When did this happen? I didn't find ZH until 2010, so I guess I missed the MTM trick. When I was in LA during the '08 panic, I was told by those on my former trading desk that MTM had been out for awhile and would never be back----what happened in '09, did they threaten to mark again?

Come on. fill me in I don't want to look it up on Goooooogle----

Oh, and the answer to your question as a cheap buyer of defaulted bonds is 10% as a bid and pay what its worth over that, but there was always a false bid of 20% in front of you from NY---that was a long time ago, come to think of it, but i'd pay ten for anything I thought I might make some money on----hey, do bonds still come with indentures  

Thanks              om 

Thu, 05/17/2012 - 11:40 | 2435743 slackrabbit
slackrabbit's picture

JD: What do you mean 'you were reading the chart upside down'?

Thu, 05/17/2012 - 11:45 | 2435769 bdc63
bdc63's picture

LOL -- at least THAT would make since ...

Thu, 05/17/2012 - 13:29 | 2436228 Seer
Seer's picture

It's an upside-down world!

Thu, 05/17/2012 - 11:45 | 2435770 BalanceOrBust
BalanceOrBust's picture

This is really bad.  JPM has capital of about $170 billion (effectively this is what the shareholders could take out if all positions were unwound and the bank was closed down).  This capital is leveraged up about 10 times thanks to deposits and loans ($1.8 Trillion of each).  Already, keeping reserves on hand requires work and skill, but any commercial bank can handle this.  Tier 1 capital ratio at 10 is fine, if the markets are working smoothly. 

But if JPM can't manage its risks properly, then what the heck is it down taking $170 billion in shareholder equity and building up derivatives positions of $70 Trillion? 

Sure, all the positions are in balance... until they are not.  Bruno showed us how a small error can result in a $3 billion loss.  $3 billion on $70 Trillion is small potatoes, but on the $170 billion in shareholder equity, it is already significant. 


Now I hope JP and the boys don't have any other bad hedges/bets on, but you can compute the probability for yourselves.  IF there is $70 Trillion in derivatives exposure, how many errors before you $170 billion in equity is wiped out?



Thu, 05/17/2012 - 11:46 | 2435776 roguetraderinchicago
roguetraderinchicago's picture

being short gamma is a bitch!


Thu, 05/17/2012 - 11:50 | 2435801 web bot
web bot's picture

I once heard a person say something in French to a little boy. The little boy then turned to his dad, and said in French, "I know he's taking French, but I don't understand what he's saying".

I don't understand a word you're saying, but excellent analysis. This stuff if beyond me.

Thu, 05/17/2012 - 11:58 | 2435829 gianakt
gianakt's picture

JPM is still net short large positions of Gold and Silver and the floor traders and country central banks have started to sqeeze there shorts today with this rapid rise in gold today!!!

Thu, 05/17/2012 - 12:00 | 2435834 Everybodys All ...
Everybodys All American's picture

A hedge is not a true hedge if it can lose you money. The guy had no way of offloading Bernanke's mistakes.

Thu, 05/17/2012 - 14:54 | 2436660 Herd Redirectio...
Herd Redirection Committee's picture

Hedging is just the word used so people don't use the appropriate words: speculation and gambling.


It keeps the ordinary sheep from getting freaked out, they don't know what a hedge is, but it has been explained to them that it is safe, risk-free, prudent, like buying insurance.

Fri, 05/18/2012 - 02:40 | 2438728 oldman
oldman's picture

True hedges do not exist---the best I ever did was plus or minus one or two per cent on small hedges for small users----conceptually, you are correct, but in practice---------------------om

Thu, 05/17/2012 - 12:07 | 2435851 lunaticfringe
lunaticfringe's picture

Tranch. Notional. Mimicry. Delta hedging. Implied delta. Fuck me running. No wonder we gotta have pictures.

Thu, 05/17/2012 - 12:08 | 2435852 Sutton
Sutton's picture

Jim Willie says the loss is 18 Billion.

I think this starts the unwinding and destruction of the OTC markets, from which no one will emerge alive.

Thu, 05/17/2012 - 22:48 | 2438283 oldman
oldman's picture


That is what I have been thinking about----everybody's in the deal! No one is going to get out----unless they declare the derivatives 'null and void' and the CBs restore enough capital when everyone finds his chair to fund the banks to be ONLY BANKS!

The loss of 18 bills is not the problem; it is a BIG ball of yarn to unwind------and who takes the other side all the way down? Maybe those five big dudes just go away broke and that's the end of it----is that what the Dallas Fed is saying--I haven't heard from it in a while.

Sorry to be so hyper, sutton, but this is really exciting shit for this oldman       om

Thu, 05/17/2012 - 12:29 | 2435945 xtop23
xtop23's picture

Are we sure that this whole thing wasnt done on purpose so that increased regulation could be put into place?

Greater regulation that JPM could easily comply with but smaller financial entities could not, allowing them to pick off more of the small fish.

This would result in JPM becoming even larger and more omnipotent.

Thu, 05/17/2012 - 14:57 | 2436677 Herd Redirectio...
Herd Redirection Committee's picture

Nothing happens by accident.  It was probably a redistribution by JPM to its 'handlers' (TPTB).  That is, JPM backed by the US tax payer loses a bunch of money in a silly trade, meanwhile who is on the other end of the trade, but the directors of JPM, the uber-mega-rich, the politically well-connected, etc.  So the firm loses, but the individuals profit. 

Money is just a tool for gaining power for these people.  You can never have enough.  People think billionaires are greedy, no, they are psychopathic powermongers IMO.

Thu, 05/17/2012 - 13:10 | 2436145 Olympia
Olympia's picture

The end of the world is near.

When Barack Obama announced the US (2010) national budget for this year, we experienced unprecedented feelings. Never before had an imperialistic power moved them to pity. This is unthought-of. This year’s deficit is estimated to be $1.6 trillion and its foreign debt has gotten completely out of hand. It hits numbers that only mathematicians and astrophysicists knew existed few decades ago. There is no space for these numbers in the electronic boards so it is driven to add new elements on them.

 It all started with the big crisis of 1929. The American economy reached a deadlock because of its social "pathogenesis"; a deadlock that led it to economic crisis in a different - faster- pace than the rest of the industrial forces of that time. Important decisions had to be made - mostly social - and the Whites didn't like that, especially the Whites' rulers, the Anglo-Saxons.

Authored by Panagiotis Traianou

Thu, 05/17/2012 - 13:10 | 2436146 Jake88
Jake88's picture

JPM hedging.  Place a huge bet and hope for the best.

Thu, 05/17/2012 - 13:25 | 2436206 bxy
bxy's picture

at the end of your discussion when you talk about getting shorter on the way up (having to hedge by buying more underlying as it goes up) and longer on the way down (having to sell underlying on the way down to say delta nuetral) is a negative gamma position.  So I am this guy was short a boatload of options for whatever reason and was forced to x amount of underlying buying high and selling low.  This may be dubbed the JPM "hedging"

Does this seem accurate?

Thu, 05/17/2012 - 16:28 | 2437139 Dry Drunk
Dry Drunk's picture

buying high and selling low is the correct implication, but you are describing a long gamma position.

I don't have a graph of the value of the IG9 10Y 15-100%, but what is being alleged here is that the delta changed in ways that were not predicted by the financial model, further exaggerating the buy high and sell low.

I posted some shite about gamma in the wrong discussion board the other day -- too drunk to find a board on topic -- so I'll repost and I'd like people to take it to the woodshed and beat it severely:

What on earth does Hendry mean when he says "the market is long gamma".

I think he means that in aggregate the market is expecting a convex payoff. So there are different strategies and there is a balance in the price but beneath this that will be reflected in future trading strategies is that eveyone wants a convex payout. Convex payoffs appeal to both our fear and greed in equal measure. So Hendry is saying that the market is fearful and greedy. I would say that a long gamma market is a whimp and can be pushed around.

The concave traders who average on the way down because they believe in value; they have balls. That's the start of a bull market when this attitude dominates the market. Then over time fear and greed raise their heads and the market gets longer gamma. And this escalation can be magnified, for the opposing strategies keep price in line for a while, while ramping up their convexity using leverage with dynamic trading. Then the market is pushed around and the market loses its power, because leveraged positions have a huge weakness. You can't sit. So when Jessee Livermore said it is important to be right and sit-tight, he meant not to go convex. Leverage and you can't sit-tight.

This bull market hasn't finished yet, everyone has gone to the convex side of the force. I've never seen a proper bear market, and I don't think anyone alive has. Are we about to see the first big bear market since the South Sea bubble crashed?


Thu, 05/17/2012 - 14:21 | 2436481 Confundido
Confundido's picture

Was this guy right then? 

Thu, 05/17/2012 - 14:28 | 2436509 jmc8888
jmc8888's picture

Their models turned out in reality to look more like Smeagol then someone from Victoria Secret?  Who could've thunk it? Their models turned into a big fat ZERO just like every other model on a long enough timeframe.

Pretty funny that one of the banks that temporarily survived because of the Fed, has been hampered because of it.   Best of inbreed indeed.

Just wait until all their other 'models' are realized as zeros.  70 trillion in worthlessness. 


Thu, 05/17/2012 - 14:31 | 2436530 UP4Liberty
UP4Liberty's picture
How well does the Fed protect the purchasing value of the dollar? *Texas Straight Talk, by Congressman Ron Paul, May 14, 2012:

''First, it is important to understand the Federal Reserve System.  Some people claim it is a secret cabal of elite bankers, while others claim it is part of the federal government.  In reality it is a bit of both.  The Federal Reserve System is the collusion of big government and big business to profit at the expense of taxpayers.  The Fed's bailout of large banks during the financial crisis propped up poorly-run corporations that should have gone under, giving them a market-distorting advantage that no business in the United States should receive.  The recent news about JP Morgan is a case in point.  JP Morgan, a recipient of $25 billion in bailout money, recently announced it lost another $2 billion.  If a corporation shows itself to be a bottomless money pit of 'errors, sloppiness and bad judgment,' the Fed shouldn't have expected $25 billion in free money to change that or teach anyone a lesson in fiscal discipline.  But it determined that this form of deliberate capital destruction was preferable to one business suffering bankruptcy.''

Thu, 05/17/2012 - 15:15 | 2436778 Herd Redirectio...
Herd Redirection Committee's picture

"Some people claim it is a secret cabal of elite bankers"

Its a bit of both because they have taken over the government, Ron!  You are telling people 90% of the story here.


Its a secret cabal of international bankers, who have no loyalty to any one religion, nationality, currency, etc.   But the one thing they have in common is their worship of Mammon.

Mon, 05/21/2012 - 13:30 | 2448123 MeelionDollerBogus
MeelionDollerBogus's picture

To miss this obvious chart you'd have to be blind... or MillionDollarBonus_
even Jim Cramer can't possibly be buying & selling what he says others should...

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