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
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Want another good laugh? BAC is up today.

Do NOT follow this link or you will be banned from the site!