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Irony 101 Or How The Fed Blew Up JPMorgan's 'Hedge' In 22 Tweets

Tyler Durden's picture


Many pixels have been 'spilled' trying to comprehend what exactly JPMorgan were up to, where they are now, and what the response will likely end up becoming. Our note from last week appears, given the mainstream media's 'similar' notes after it, to have struck a nerve with many as both sensible and fitting with the facts (and is well worth a read) but we have been asked again and again for a simplification. So here is our attempt, in 22 simple tweets (or sentences less than 140 characters in length) to describe what the smartest people in the room did and in possibly the most incredible irony ever, how the Fed (and the Central Banks of the world) were likely responsible for it all going pear-shaped for Bruno and Ina.

Of course we do not know exactly what positions were undertaken and what the mandate was for the CIO Office but our assumption is that they are 'smart people', had no positional constraint (i.e. any asset class, any instrument), and more than likely were human emotionally.

1) Post QE2, JPM's CIO group needed to hedge tail-risk of bank debt portfolio.

Credit risk was rising rapidly and had reached levels not seen since the the real chance of tail events was creeping up fast...

2) JPM traders/risk managers are not stupid - can manage curves/levels in 'normal' market but firm needs 'extreme' risk hedge.

Critically - these guys are not dummies - they don't simply buy/sell index protection or curves (as some have suggested) in ultra-massive quantities (since risk models would flash) unless there is an edge. More importantly, they can manage risk at desk levels on term structures and exposures (and even jump-to-default risk to some extent) but on the aggregate portfolio there is a lot of un-covered risk of an extreme event (which seems ever more present) occurring.

3) VaR risk model can 'comprehend' most of 'normal' market moves but not extreme tail risk (illiquidity, basis, correlation shocks).

VaR models (even the most sophisticated Monte Carlo engines) will have significant problems integrating the kind of extreme risks that need to be hedged to avoid catastrophic loss (such as basis risk (the risk that a hedge disconnects from its underlying), illiquidity (some models incorporate a market-impact but very few do it well or even close to reality), and most assume correlations to be relatively stable (not a dynamic variable - which is critical to the pricing of many credit instruments).

4) Goal: Find as low-cost a 'systemic risk' hedge as possible (with longer maturity than options allow).

So, likely at the behest of management, the CIO office set out to find cheap ways to manage this extreme risk. Equity protection was (and is) expensive as evidenced by skews and term structures but credit offered some room for value (and moving from options to tranches - not important what they are other than levered complex credit positions - allows a longer-maturity hedge to be placed - typically at lower cost than rolling options premia over time)

5) Hedge choice made:- Senior Tranche (Low cost, Low spread delta BUT hard to model risk in agg. book & very long correlation).

Senior (or the highest position in the capital structure) tranche positions provide attractive hedges for a systemic (or even cyclical) tail-risk. As seen below, courtesy of Morgan Stanley, the hedge is 'low' /'medium' cost and has high sensitivity to systemic risk. Implicit in this is the fact that it is very sensitive to the correlation of asset defaults.

6) Bought CDX Tranche Q3/4 2011. Provides systemic hedge (will payoff if things are VERY bad but relatively calm if things are OK).

See table above (perhaps was a more complex tranche term structure, cross-quality (IG-HY) or pairs-trade but the endgame was the same - to get long correlation, at a low cost, in a systemically careful - unsuspected - manner).

7) Tranche is sensitive to spread movements (low), volatility (medium - due to hedging gaps), and correlation (high).

These characteristics appear fantastic at first glance - not too sensitive to spread movements overall (ceteris paribus), volatility will cause some drama (as the position will need to be rebalanced), and while correlation is a big sensitivity it is directionally in our favor and has relationships in line with spreads that should help us.

BUT, sometimes the tranches do not always behave exactly as one would expect - due to the second and third derivative interactions of the model parameters...

8) Correlation is market's way of thinking about systemic risk (low correlation equals idiosyncratic risk dominates).

The critical part of our story is comprehending what it takes to crush the most senior part of a capital structure of a portfolio of credits. A few defaults here and there will not affect the most senior or 'secured' aspects of the balance sheet of a portfolio (which is what we call idiosyncratic risk - CHK there, ALLY here, EK then, SHLD soon etc.) but what really worries a manager is if systemic risk rises rapidly due to some event (say a huge liquidity crunch or Greece leaving the Euro and a run on Italian/Spanish bank deposits) which could cause many firms to default simultaneously from a total lack of funding or credit availability (think 2007/8/9). The probability of this 'systemic' event is priced into these credit tranches using the term 'correlation' - low correlation in generally good times when systemic risk is low and idiosyncratic risk dominates (individual firm balance sheets etc.); high correlation in systemically bad times (when something systemic is sinking all boats).

As seen in the chart below - correlation had been stable from the start of Jan11 and was rising modestly as USA downgrade and European woes picked up - though not crazy enough to make pricing expensive...

9) Q3/4 2011: European/US Chaos reigns: Correlation high (hedge doing well) - CIO office reveling in glory of smartness.

See chart above for Sept/Oct movement in correlation - rising

10) Nov2011: Fed/ECB start coord. global easing program -> starts to crush correlation as systemic risk is 'supposedly' removed from system.

And here comes the critical aspect of our story!


The actions of the Fed/ECB/rest-of-world with massive and unprecedented easing efforts was perceived by the market as a tail-risk crushing event - i.e. they removed the systemic risk from the system once again.


Look at the chart above to see what happened to the short-term correlation (red arrow) - it was squelched to levels we had not seen before

11) JPM CIO office forced to sell IG9 protection to manage tranche position as correlation drops (think: delta rebalancing).

What this meant was very important. The tranche - which had been purchased as a hedge for JPM's aggregate (likely long) book required rebalancing as the 'models' used to price and risk manage such positions would have demanded some hedging of the hedge. This is similar to maintaining a delta-hedge on an option position as the market moves one way or another and volatility (a secondary parameter) changes. The trouble is - these systemic risk tranches are HIGHLY sensitive to this somewhat 'magical' measure.

12) Q1 2012: Correlation plummets massively: the 'tail-risk' hedge is needing huge amounts of index rebalancing to keep it 'stable'.

As correlation plummeted - i.e. the market pricing forced the inputs to the models to change which altered the risk sensitivities - so the tranche 'tail-risk' hedge itself needed to be hedged in increasing size. This is likely when Iksil began to be forced to sell IG9 (this is the index upon which the only liquid tranches are based) protection - an oddly bullish position given the bearish nature of the tranche hedge - as all sorts of wonderful second derivative interactions played havoc with his models. Given the size of the firm-wide tranche hedge, and the implicit leverage this tranche infers, this would have meant very heavy index protection selling (in what was not a hugely liquid index anyway.)

13) Mar/Apr 2012: JPM CIO corners IG9 index market as forced protection seller on tranche tail-risk hedge position.

This meant that the JPM CIO office began to sell more and more protection at the index level (dark blue line below) which forced the index to trade differently to its intrinsic or fair-value. These kinds of disconnect (red arrow) are often arb'd by sophisticated hedge funds - but this time the arbs were being frustrated (orange line) by a SIZE player dominating the market and soaking up their demand for protection (the funds would be buying protection on the index - the opposite of JPM CIO - while selling the underlying names protection).

14) Funds complain of richness of IG9 to intrinsics and how technicals are crushing their attempts to arb - the Whale Is Born.

See chart above (red arrow) as the whale began to dominate the market flow. This means that no matter what effort the hedge funds put into the arbitrage (to try and move the orange line higher - back to its more normal zero level) - they made no difference - and in fact were often hurt significantly

15) Momentum takes over and Iksil becomes self-aware - and potentially presses his position (unbalancing the hedge).

We suspect that at some point the daily rebalancing of the hedge's hedge and the constant and consistent rally in credit and equity markets became too much for Iksil who just became another momo monkey, perhaps leaving a little too much long index protection on the basis of the rally extending...i.e. over-hedging LONG his implicitly short credit/systemic hedge

15) European sovereign, China slowdown, and US growth risks spur deterioration in credit risk - meaning losses on IG9 index position.

Between his huge size and the velocity of the shifts in the index as things began to go wrong fundamentally, Iksil was in trouble. Not only that but 'correlation' began to pick up and so the hedge of the hedge needed to be unwound...

16) JPM CIO faces huge losses from small move in spreads since they have sold so much protection and tranche unbalanced.

He found himself the dominant long player in a market in which fundamentals, technicals (arbs), and his own models (correlation) were saying unwind/short - which starts the pain trade for Ina and Bruno and more than likely this is when the bells started to go off in risk manager's ears and Dimon got the call...

17) Funds arb the skew and press IG indices knowing JPM needs to unwind/hedge the index hedge of the 'tail-risk' hedge.

It was a poorly kept secret obviously and left a market smelling blood. JPM looks for any way to manage this position - i.e. find any liquid hedge to cover the overly-long index protection that Iksil had over-hedged the original tail-risk hedge with. There's not enough liquidity in the original instrument so any and every credit instrument gets hit...

18) All credit instruments blow wider (as JPM - or front-run by peers) look for any and every liquid hedge to manage over-hedging.

last week or so this has been occurring with the worst happening post Dimon's call...

19) IG9 skews normalize (today) relieving some pressure - seen this the last 2 days.

The arbitrage between the index and its intrinsic value has smashed back to almost zero (-3bps or so - see chart above) as the technical pressure from the whale is relieved and the arbitrageurs flow can 'correct' the index back to its idiosyncratic reality. This likely slows the pain trade as the arbs will unwind their position removing some pressure from JPM now.

20) HY18 massively cheap (and HYG underperforming) - suggests long HY position but scary technicals remain.

The on-the-run high yield credit index (meaning the most recent vintage HY spread index in credit derivative land) has seen its index spread (dotted line red arrow) explode relative to its intrinsic value (orange arrow). This is an example of the 'technical' flow that reaching for any and every liquid hedge has caused in the last few days - and leaves HY18 extremely cheap to its fair-value.

Today also saw HYG (the high-yield bond ETF drop dramatically) as another example - and most notably - perhaps JPM was the cause of the HYG collapse relative to NAV at the start of April (orange ovals below)...

21) Did JPM unwind some of tail-risk hedge? What further losses did they take on index hedge of tranches?

We can only hope so - and would suspect so given the recent gappiness but it is unclear what losses they faced on those positions and what model parameters they are now using to price the underlying tail-risk hedge that is likely up in value significantly in the last few days - this is where we suspect the truth is being hidden. At some point the market will once again force a rerack of the model parameters and we suspect the worst is not over here - especially if we see systemic risks continue to rise rapidly - more rapidly than the unwind can occur - key to this will be the number of defaults but the MtM volatility will pressure JPM's earnings without doubt - though it seems unlikely that JPM would not have managed to hedge a lot of this systemic over-exposure - though basis risks become even more complex.

22) Summary: JPM tail-risk hedge imploded thanks to Central Banks' Systemic Risk reduction - unintended consequence...

The key factor is that if systemic risk had remained in even a 'normal' range of possible regions based on history, then the JPM CIO office would have had no need to over-hedge their tail-risk hedge position, no greed-driven need to press the momentum, and no need for such an epic collapse as we are seeing now.

The point is - this was a trader/manager with a good idea (hedge tail risk) that was executed poorly (and with arrogance) but exaggerated by the unintended consequences of the Central-Banks-of-the-world's actions (and 'models behaving badly' as Derman would say). 


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Mon, 05/14/2012 - 23:26 | 2425749 hedgeless_horseman
hedgeless_horseman's picture the real chance of tail events was creeping up fast...

This article just increases my man crush on Tyler, and per our President, that is ok.

Mon, 05/14/2012 - 23:31 | 2425755 BlueCollaredOne
BlueCollaredOne's picture

This article reminded me that I know absolutely nothing about finance.

Tue, 05/15/2012 - 00:18 | 2425763 hedgeless_horseman
hedgeless_horseman's picture



Trading is easy.  

This next week, or two, just keep buying this:

Sell half when it goes up 20%, the remainder when up 40%, and all if down 10%.

...but only if you believe, like I do, that European banks, and especially France, are FUBAR tout suite.

Viva, Monte Carlo, bichezzz!!!!

Tue, 05/15/2012 - 01:53 | 2426017 Oh regional Indian
Oh regional Indian's picture

Butt it's all okay HH, because Gaybama was on the View telling the ladies last night that JPM is the bestest managed bank in the whole world.

No worries. All is 

No wowwies.

Let's accelerate this train to wreck o=point, shall we?



Tue, 05/15/2012 - 03:12 | 2426072 AldousHuxley
AldousHuxley's picture

only hedge against extreme long tail risk is....diversification.


you never know which bank is going to fail due to scandles, executive mishaps, terrorists, etc.

so spread your wealth around in different banks, gold, house, rare art & collectibles, etc.


It is GOLDman sachs, not FIATman sachs...

Tue, 05/15/2012 - 08:21 | 2426248 GetZeeGold
GetZeeGold's picture



How The Fed Blew Up JPMorgan's 'Hedge' In 22 Tweets 


That damn Tweety bird....


Tue, 05/15/2012 - 07:39 | 2426208 WhiteNight123129
WhiteNight123129's picture

Well well well, those tail risk and modeling hedges are circular, in other words, they are not objectively verifiable, and hence it is the belief that they work that make the tail risk and other hedging seemingly efficient. However this depends on other people view on whether or not it will work and behave. So while they look objective because of the mathematical allure those are almost entirely behavioral. It is the behavior of the central bank which changed the reality. So everyone is thinking he (she) is a price taker of observable reality, while in reality, it is the collective action of people using those models which drives the price, so the cause and the effect are totarily blurred. Is it the reality of price which is driving the need to hedge, or is it the behavior of hedging which is driving the price, the dog and its tail back and forth.... Useless waste of time.

We could try voodoo rules, make sure everyone is convinced about those voodoo rules and the game of expectation counter expectation would be the same. In the meantime buy productive agricultural land at 3,000 USD per hectare in Malaysia, have a look at 200 years of history of prices, interest rates, market behavior and let people scramble to pick-up a few pennies in front a streamroller, while you will make 3-4 times your money in 5 years. WHy? The smash of the exponential function into the finite world coupled with monetary hose...


Tue, 05/15/2012 - 10:39 | 2426933 Omen IV
Omen IV's picture


Tue, 05/15/2012 - 15:14 | 2428445 Convolved Man
Convolved Man's picture

Before the introduction of stabilizing compounds, the production and handling of nitroglycerin, though lucrative, was extremely hazardous.

Wells Fargo can attest to that.

So its nice to know that JP Morgan & Chase are in the completely predictable and safe business of investing/trading/hedging/betting with synthetic credit derivatives.

Mon, 05/14/2012 - 23:39 | 2425770 LongBalls
LongBalls's picture

What this article explains to those who do not understand it is not to play a game they will get slaughtered at. And the investment community can't understand why retail investors have left the building!! See ya sucka's. I'm out of your game and into the game of true weight and measure. Gold and silver.

Tue, 05/15/2012 - 05:36 | 2426122 Dr Benway
Dr Benway's picture

Well it seems the so-called pros don't know what the fuck they're doing either. It just resembles gambling to me. With other peoples money.


The thing with all these supercomplex models and formulas and shit in finance is that a lot of them are just bullshit. They may require advanced mathematics, but crucially, that doesn't mean that they will work.

Tue, 05/15/2012 - 08:55 | 2426385 BurningFuld
BurningFuld's picture

True can make all the models you want but you can not predict the future. What these guys are doing now is feeding on each other because the money from fake mortgage loans is no longer there and they have most likely burned through all the money from Uncle Sam at this point.

Tue, 05/15/2012 - 11:04 | 2427048 Gloomygus
Gloomygus's picture

Actually, you can predict the future if your actions are precisely designed to bring it about. First you need to amass a great deal of power - then you simply apply it.

Tue, 05/15/2012 - 08:55 | 2426386 orangedrinkandchips
orangedrinkandchips's picture



So does that mean you are down with OPM? yea you know me.....Other People's money. I put YOUR money on ANY bet in a casino....duh....why not!




Let these fucks do what they want, but, if you blow it and go belly up then YOU PERSONALLY LOSE EVERYTHING.....PERSONALLY. CLAW BACK.




Mon, 05/14/2012 - 23:49 | 2425792 sunnydays
sunnydays's picture

I am with you on that.  the only thing I do know, is I couldn't be happier as it couldn't have happened to a "better" bank.  Now, I am just waiting for Goldman Sachs information and them coming out with billions of losses.  It is Christmas in Spring.

Tue, 05/15/2012 - 09:53 | 2426664 Day_Of_The_Tentacle
Day_Of_The_Tentacle's picture

To me the big question is, why did Mr. Dimon publish this in the first place?

If I understand the article correctly, JPM put on a "bulk wholesale" hedge to cover all the "thrown-in-a-bucket" risks that cannot be calculated and modelled on individual positions. The hedge is made from a negative outlook on the systemic risks of the world. Very sensible.

The hedge is made out of some senior credit paper, that would benefit from general panic and problems, because it is percieved as safehaven, and therefore less likely to suffer from lack of liquidity and mass defaults. The hedge is doing great for a while during the unrest, because investors are flocking to the senior safe paper bidding up the value. 

The Fed/ECB/BOE/BOJ ramps up the market meddeling, and reverses the picture. JPM has to go against their true opinion and sell alot of index protection to hedge the hedge. Fed/ECB/BOE/BOJ reduces market meddling, downplays possibility of QE etc. and original bulk hedge starts doing better again, while index hedge gets nasty. Index hedge is not easy to unwind because index is not very liquid, and because Hedgies play against them. The unbalanced hedge-hedge will get worse as the general market situation gets worse again. That unwind seems to have become more difficult and expensive due to Mr. Dimons conference call.

So why did he do it? Is it because he needed the Fed to get the bloodhounds of his back? Was it a ploy to get this well connected new CIO on board? Is it because he knows that something else is coming up that will positively explode everything, so he needed cover to do some very detectible repositioning? 


Tue, 05/15/2012 - 10:38 | 2426892 Gloomygus
Gloomygus's picture

Recall after 9-11 there was a great deal of inquiry into who might have profitted from the mother-of-all-systemic-collapses - the World Trade Center fell over (actually it fell precisely straight into the ground). If one knew that the father-of-all-systemic-collapses was coming, and one wisely insured oneself against it, you would reasonably expect an inquiry into why the insurance was purchased when it was. If you perhaps had some friends that could help you in advance of the father-of-all-systemic-collapses make your wise insurance purchase look like a horrible decision, you could broadcast your "horrible" decision far and wide. By changing the perception of your wise decision to that of a horrible decision, you would suffer far less scrutiny when the "insurance" pays off. And it will, very very soon I'm afraid - just look at the power of the players arranging their pieces and altering public perceptions. Is anything going on this weekend? Maybe you all should get yourselves some insurance, just like those idiots at JPM who had their insurance all "messed up" by the central banks - maybe you should do so right this very second.

Tue, 05/15/2012 - 10:52 | 2426989 Gloomygus
Gloomygus's picture

Speaking personally (and quoting the late great Janice Joplin):

"When you ain't got nothin, you got nothin to lose."

If you still have something, protect it now.

Tue, 05/15/2012 - 12:21 | 2427563 Day_Of_The_Tentacle
Day_Of_The_Tentacle's picture

It is scary how much that makes sense to me. Thank you so much for your answer. I have the same sense of an imminent "sequoia-in-anthill" episode coming down.

It is just odd to my oldfashioned logic, how debt can function as insurance in what I anticipate to be an upcoming debt-destruction mayhem. I guess, that if you are sitting on that kind of money, you cannot put eveything into tangibles - or rather, that the way to lay your hands on tangibles in the process, is through taking collateral on defaulting debt.

You have a nice subtle tone to your post, so you probably do not like too direct questions, but I will try anyway. Today, when everything is trading completely contrary to common sense, would you agree, that if one has got somethin', and one is indeed seeking to protect said somethin' - that one would do well by taking guidance from 5000 years of historic precedent?

Tue, 05/15/2012 - 12:27 | 2427638 Day_Of_The_Tentacle
Day_Of_The_Tentacle's picture

Oh yes, you pose the question, if something is going on this weekend. The immediate thought is a missile-slinger convention in Chicago, followed by a somewhat unorthodox bi-national gathering of men in green in Colorado the week after. Is that what you are alluding to?

Tue, 05/15/2012 - 15:01 | 2428389 Gloomygus
Gloomygus's picture

I am sorry but I can't help you

Tue, 05/15/2012 - 15:41 | 2428599 Day_Of_The_Tentacle
Day_Of_The_Tentacle's picture

Please don't get too discouraged by those vultures in the other thread. Many have been here for a long time, and have aquired a very cynical tone. We are probably all suffering from disaster fatigue and are very thankful that this site is publishing, what it does. Without it, most of us would have continued to be sitting ducks. You seem to have something on your mind, so please do not let the roughness shut you up. There are many more "listening in" than those, who are quick to judge and ridicule. In any case I appreciate your answers above. They have given me food for thought.

Tue, 05/15/2012 - 00:05 | 2425826 ACP
ACP's picture

Or more importantly, how the "professionals" know absolutely nothing about finance either.

Tue, 05/15/2012 - 01:18 | 2425951 dbomb12
dbomb12's picture

Just ask Randolph and Mortimer Duke

Tue, 05/15/2012 - 02:24 | 2426041 NewThor
NewThor's picture

Randolph and Mortimer Duke are Dead. They have been replaced by SKYNET. Goldman Sachs suggests you buy your kids the new Predator Drone toy with the death from above grip.

Tue, 05/15/2012 - 03:46 | 2426084 StychoKiller
StychoKiller's picture

I just wanna know where I can find some of these models behaving badly! (Don't tell my wife!) :>D

Tue, 05/15/2012 - 01:04 | 2425929 MayerRothschild
MayerRothschild's picture

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning" ~Henry Ford

Tue, 05/15/2012 - 09:14 | 2426443 Rubicon
Rubicon's picture

"Operator! Give me the number for 911!" - Homer Simpson

Tue, 05/15/2012 - 01:24 | 2425965 WallowaMountainMan
WallowaMountainMan's picture

'This article reminded me that I know absolutely nothing about finance.'

me too, but its fun to try to pick up the poetry, getting a sense of the flow of the article. thoroughly enjoyed, and will spend time right clicking and searching terms, picking up bits and pieces. great article. classic zh. and i do mean classic. when people look back at this time frame, no question, zh....must read source material.

ain't the internet great.

Tue, 05/15/2012 - 06:57 | 2426159 Ricky Bobby
Ricky Bobby's picture

I call it working on my "ZHD". 

Tue, 05/15/2012 - 08:26 | 2426304 LawsofPhysics
LawsofPhysics's picture

What is to know?  Just make sure you go to the "right" school and get as close to the "free money" as possible.  In a world where there are apparently no consequences for bad behavior and the wishes of a few can be granted on the backs of the masses there is nothing to know other than you want to be one of the "few".  Get it?

Tue, 05/15/2012 - 08:43 | 2426348 Unbezahlbar
Unbezahlbar's picture

I  like it, Tyler. I learned 18 new english words by reading your article.

I am still working on the concepts.

Tue, 05/15/2012 - 06:43 | 2426147 BandGap
BandGap's picture

This hints at a few things that should be noted.

1. There is no collusion between the governments and big banks. I think both can see a macro picture, neither understands the small wobbles being introduced.Whe you apply old models to new environments they fail this way.

2. Trend models to anticipate risk have gone to shit since variables - the meaning of the variable, the weight of the variable IS VARIABLE. People in hedge situations using this debacle as an example of what not to do have to be shitting themselves.

3. This is happening somewhere else, to someone else, as I type this. JPM is a leader and it's actions are noted by others.

Tue, 05/15/2012 - 07:22 | 2426184 dolly madison
dolly madison's picture

There is no collusion between the governments and big banks.

That statement is too bold for me.  It should be: There was no collusion between government and the big banks in this instance.

Tue, 05/15/2012 - 08:59 | 2426395 BurningFuld
BurningFuld's picture

Wait a minute. Or course there was collusion somewhere just not with JPM. I think Jamie must have missed an important party. Idiot!

Tue, 05/15/2012 - 11:14 | 2427090 Gloomygus
Gloomygus's picture

Right, no collusion. Try being a little less overt, you're screwing it up.

Tue, 05/15/2012 - 11:16 | 2427098 Gloomygus
Gloomygus's picture

Don't put the conclusions they're supposed to draw in bolded block capitals - it's too obvious. From: Management

Tue, 05/15/2012 - 11:19 | 2427119 Gloomygus
Gloomygus's picture

And really, he's right about the bank not colluding with government. You can't collude with yourself.

Tue, 05/15/2012 - 09:20 | 2426466 Budd aka Sidewinder
Budd aka Sidewinder's picture

apparently, neither do they

Tue, 05/15/2012 - 00:43 | 2425902 Eireann go Brach
Eireann go Brach's picture

Just when you think you are getting a grasp on things, Tyler goes and writes this piece! Fucking geniusl lol!

Tue, 05/15/2012 - 05:30 | 2426123 Dr Benway
Dr Benway's picture

LOL. yeah i feel the same!

Tue, 05/15/2012 - 01:19 | 2425953 HD
HD's picture

Anyone else notice how the Tylers don't chime in on the comments section anymore?

I'm sure this is to present a detached professionalism and maintain ZH creditability, but this IS fight club afterall - I hope the days Tyler would pop in and tell a deserving asshole to "sit the hell down, and shut the fuck up" are not gone forever.

Tue, 05/15/2012 - 07:07 | 2426169 Ratscam
Ratscam's picture

he did so yesterday

Tue, 05/15/2012 - 03:56 | 2426090 Silvergood
Silvergood's picture

Fabulous article....Keep exposing Tyler!!!

Tue, 05/15/2012 - 08:44 | 2426359 battle axe
battle axe's picture

Tyler great article, thank you. As I said last week, there is going to be more blood in the water on this trade, this bad boy is going to bleed some more $$$$ for JPM. 

Mon, 05/14/2012 - 23:32 | 2425759 LongBalls
LongBalls's picture

This shit is so complex why in the hell would anyone buy anything other than PM's?

Tue, 05/15/2012 - 00:15 | 2425860 Gidas19
Gidas19's picture

I remember my old professor used to tell students to explain every "complex" definition/theory in finance in ONLY few words. He said if you can't do than you don't understand it. Well, let me summarize this article in "few" word... JPM FUCKED UP

Tue, 05/15/2012 - 03:47 | 2426086 StychoKiller
StychoKiller's picture

I always find it amazing that people have some sort of betting system at the roulette wheel(s).  Why not just give yer munny to the pit boss directly?

Tue, 05/15/2012 - 08:07 | 2426254 Mach1513
Mach1513's picture

I had a roulette system. Won seventeen consecutive visits to local casino - followed by eighteen consecutive losses.

Same thing - exactly! - happened buying call options.

Lesson I learned:  you ALWAYS LOSE more than you win.

And it isn't the system, dummy(me)

- it's pure luck.

Taleb also taught me that - but I read him too late.                

Tue, 05/15/2012 - 08:35 | 2426322 LawsofPhysics
LawsofPhysics's picture

Gee, sounds like life and thermodynamics.  First law; "You can't win",  Second law; "You can't break even"

It is all about counterparty risk period.  PM's and other physical assets that you can touch, especially those that generate revenue (such as rentals) have no counterparty risk.

JPM will be fine, because the company really only follows one mantra - Gold is money and everything else is credit.

Tue, 05/15/2012 - 08:31 | 2426310 insanelysane
insanelysane's picture

Roulette betting isn't an occupation unless you are of John Corzine's ilk.  It is entertainment.  I had a couple of buddies that martingaled a few years ago starting small and doubling on red.  Won a bit and then hit a wheel that stayed black and green.  The stopped at miss 10 and wheel didn't go red until spin 18.  Later that week we watched a wheel go 21 spins red or green.  Sometimes cyclical things take time to turn around.

Mon, 05/14/2012 - 23:35 | 2425761 prains
prains's picture

there's soon to be a lot more tail risk as all the people who understand these things will have to someday take to the forest to kill their food, that day will be a complete shit show.

Mon, 05/14/2012 - 23:43 | 2425772 williambanzai7
williambanzai7's picture


If you ask Captain Scully how to land a plane in adverse/emergency conditions, this is the kind of answer you will get.

Who do you want flying your plane?

Tue, 05/15/2012 - 03:57 | 2426091 UP Forester
UP Forester's picture

Well, Jesus was my co-pilot, but we crashed in the mountains and I had to eat him.

Mon, 05/14/2012 - 23:40 | 2425773 BlackholeDivestment
BlackholeDivestment's picture

ZH TDs, it is such a gift to read this analysis. Thank you very very ...very much. Wonderful work!

Tue, 05/15/2012 - 08:38 | 2426332 LawsofPhysics
LawsofPhysics's picture

Your link points out the real problem;  there are no real consequences for the bad behavior for these "elite" motherfuckers.  Is it any wonder they continue to enrich themselves at the expense of everyone else?

Mon, 05/14/2012 - 23:47 | 2425787 fuu
fuu's picture

9) Q3/4 2011: European/US Chaos reigns: Correlation high (hedge doing well) - CIO office reveling in glory of smartness.

Hookers and blow all around!

Mon, 05/14/2012 - 23:48 | 2425788 BalanceOrBust
BalanceOrBust's picture

Great post.  It just goes to show how these guys at JPM and other banks think.  If you have a risky portfolio because you are over-leveraged to the tune of $70 trillion in derivatives on $1.8 trillion in assets, don't worry.  What is more, don't de-leverage or reduce your positions.  It is way more effective to reduce your risk by buying even more derivatives with unknown correlations to yet more stuff that you will need yet more derivatives for.

I don't understand this stuff... but neither do they.

What a load of bullsh*t.


Thanks Tyler, as usual, for exposing the situation for what it is.  

Mon, 05/14/2012 - 23:51 | 2425799 LongBalls
LongBalls's picture

They are gambling. Nothing more complicated than that.

Tue, 05/15/2012 - 00:02 | 2425822 aerojet
aerojet's picture

And what really went wrong here is that they had nobody to play as a sucker because they got too big in a market where liquidity is like water in the Sahara.

Tue, 05/15/2012 - 00:33 | 2425887 Godisanhftbot
Godisanhftbot's picture

  Nope, that skank was making 30 million, she wasn't gambling at all. She was just justifying that absurd salary by doing stupid shit.

Tue, 05/15/2012 - 09:12 | 2426433 BorisTheBlade
BorisTheBlade's picture

They were gambling with somebody else's money. They are not at all that reckless with their own. And as much as anybody hates JPM and glad they blew up, make no mistake it will be you who in the end will be holding a bag after this screw up. One way or another.

Tue, 05/15/2012 - 01:58 | 2426022 Phil Free
Phil Free's picture

" I don't understand this stuff... but neither do they. "

The best single sentence I've seen.  Too true.  Tyler has an innate skill of making you suddenly feel like you only have ½ the IQ points you thought you had.  While still managing to illustrate and educate by vivisecting this ridiculous mountain of data -- showing us normal mortals what's going on 'behind the curtain', as it were.


Mon, 05/14/2012 - 23:53 | 2425802 Bansters-in-my-...
Bansters-in-my- feces's picture

And just think,some people actually work for a living.

What a fucking system .

Get a job.

Mon, 05/14/2012 - 23:56 | 2425812 BalanceOrBust
BalanceOrBust's picture

They worry about tail risk while the rest of us risk our tails.  

Tue, 05/15/2012 - 00:00 | 2425817 IveBeenHad
IveBeenHad's picture

Would you venture to guess why they didn't just rebalance delta by selling the original longs ? Why did they have to hedge the hedge? In hindsight it appears rediculous to accept some levels of risk.  Was the liquidity risk that high that they chose market risk instead ? Doesn't make sense... 

Tue, 05/15/2012 - 00:02 | 2425823 BalanceOrBust
BalanceOrBust's picture

You would understand it if you were a muppet.

Tue, 05/15/2012 - 00:08 | 2425841 Raymond Reason
Raymond Reason's picture

That would be common sense.  But these people are anything but common. 

Tue, 05/15/2012 - 00:24 | 2425871 Maos Dog
Maos Dog's picture

About this:

"why they didn't just rebalance delta by selling the original longs"

For what I read, it seems this position didn't just hedge tail risk, but also some other CDS issuance, so, if they sold the long position they would have other trades to unwind as well. I don't think the cdx ig9 is normally bought to hedge tail risk, but I am not a credit gut so I am unsure.

Tue, 05/15/2012 - 00:28 | 2425882 JackT
JackT's picture

I can't remember the guy's name but Chris Martenson interviewed him and his conclusion is essentially that "gamblers secretly want to lose" - sucks to be a gambler.

Tue, 05/15/2012 - 06:07 | 2426138 1984
1984's picture

Yeah, you'd think right?  But that sh*t could've very well  been completely illiquid and they'd need to buy/sell another piece of sh*t to offset/hedge it.  That's how the derivative notional could get so f*cking huge.

I can't claim to understand the stuff talked about here.  But based on my background in engineering, this financial engineering stuff is really a bomb waiting to blow up any time.  It seems they've created sh*tty models of reality that are highly unstable.  They're sh*tty because they don't really model reality except probably in a small region of the parameter and input space.  The models would need to be constantly rejuggled to get them to match reality again and each time they do it the region of stability gets smaller. 

This is the type of system we're trying to avoid like the plague when building real stuff like bridges, machines, and amplifiers.

Tue, 05/15/2012 - 00:01 | 2425824 wee-weed up
wee-weed up's picture

Methinks thou doth analyze it too much...

They fucked up. Period.

Tue, 05/15/2012 - 00:03 | 2425825 RoadKill
RoadKill's picture

This article makes my headspin. Its amazing how complicated our world has gotten. It also makes me realize this is the new frontiear. The people that are playing around in these markets are unbelievably smart and sophisticated compared to your typical equity analyst. This is where I need to be pokung around for the next killer trade rather then trying to figure out if Facebook is over/undervalued at 100x eps and hoping I can survive being wrong long enough to benefit from ultimately being right.

Tue, 05/15/2012 - 05:43 | 2426130 disabledvet
disabledvet's picture

"complexity is everywhere and always the hobgoblin of sound finance."

Tue, 05/15/2012 - 06:59 | 2426161 hyperbole2000
hyperbole2000's picture

Precision costs money.  Why sharpen your targeting system to 10 thou of an inch when the target moves +/- an inch every 1/4 second and it takes you 1/2 a second to reaim with your overkill accuracy target acquisitioner?

Analogy: use a shotgun not a sniper round. Some would call it diversification.

Tue, 05/15/2012 - 00:08 | 2425835 LoneStarHog
LoneStarHog's picture

With tail risk always comes the chance of a STD (Sexually Transmitted Disease) and it you are fooling around in that gay tail risk, well your chances of something worse is a real possibility.

Be careful of any tail, piece or whole.

Tue, 05/15/2012 - 00:11 | 2425844 Hedgetard55
Hedgetard55's picture

I admit it was too deep for me also. I guess you could put it short by saying "Shit got real in the JPM parking lot" (said like DJ Dave in his video "Whole Foods Parking Lot").

Tue, 05/15/2012 - 00:15 | 2425857 goodrich4bk
goodrich4bk's picture

Perfect example of why we need to return to a system where the business of commercial lending is separated entirely from the business of financial gambling, er, investment banking.  Regulate the former, free the latter and see how long the latter can stay afloat after their first beached whale.

Tue, 05/15/2012 - 03:14 | 2426075 youngandhealthy
youngandhealthy's picture

Best post I have read for a long time. What have Investement Banking to do with Banking? Just beacuse some smart a.. added the word banking to investment doesnt make the "investement banking" activites a Bank.

And as you said..."...Regulate the former, free the latter and see how long the latter can stay afloat..." is spot on.

Tue, 05/15/2012 - 08:24 | 2426293 LawsofPhysics
LawsofPhysics's picture

Amen.  Gee, look how far the financial pricks have "evolved".  Didn't we have this kind of law already in place after the great depression and two world wars?

Tue, 05/15/2012 - 00:18 | 2425864 Big Mac
Big Mac's picture

Jamie D ought to recruit some real gamblers as at least they "know when to hold them and know when to hold old them"! If you are TBTF, apparently the word stops are not in your vocabulary. ZH hits it out of the park once again.

Tue, 05/15/2012 - 00:19 | 2425867 I am a Man I am...
I am a Man I am Forty's picture

 i don't trust "markit", they probably fucked everything up

Tue, 05/15/2012 - 00:22 | 2425869 hyper-critical
hyper-critical's picture

awesome. cheers from a markets guy who only has a very basic understanding of basis, arb, and its implications. look forward to reading more as the saga continues.

Tue, 05/15/2012 - 00:23 | 2425877 Some Bloke
Some Bloke's picture

Anyone confused - go and watch Trading Places, and barrack for the good guys....

Tue, 05/15/2012 - 01:12 | 2425938 Centurion9.41
Centurion9.41's picture

#7 is a perfect example of the lie that is quantitative finance.

The charts make it appear as if there are millions of data points, each tick a voting machine to use King Neptune Buffett's favorite metaphor.

However that is a delusion. There are over the period shown only few data points; at most 10.. Each being defined by the macro drivers in the market over that given period. E.g. Sub-primed driven crash, QE1, QE2, Twist.

To assert that a hedge will work on a different and yet to be known set of market factors, say an EU breakup or an attack on Iran followed by terrorist act that poisons CA's farming region (it's watering system is very vulnerable), is beyond moronic and reckless.

It is a LIE because the Wall Street PhD's know deriving any formula or theory from such a limited data set in which they KNOW they do not know all the PAST variables, or new ones that may arise, is utter BS.

If you thought it was bad to see so many scientists willing to throw critical analysis of data out the window all for the chance at a few thousand in Global Warming research grants. Consider what their abused as geeks throughout HS and college cohorts are willing to do for millions fed directly into their pockets.

And if you feel the urge to ask how come things haven't crashed yet? Consider what playing Monopoly would be like if you played with reckless abandon and every time you screw the pooch Uncle Ben filled your lap with more colored paper.


Tue, 05/15/2012 - 05:55 | 2426133 disabledvet
disabledvet's picture

I agree with this. Having said that I do agree with the "tweet" in the article that states "the purpose of hammering interest rates down to zero is to reduce tail risk to zero." That would be TAIL RISK FOR THE GOVERNMENT however. It's still there for the banks..."just not suppose to be." Obama and Dimon have been best buddies throughout this collapse because both know each individually has a solution to the other one's problem. The media knows this too which is why they encourage this relationship and destroy all the others (everyone especially) who they perceive to be standing in the way of said "special relationship." Well...Barnard college is one thing...Wall Street another. "The money is still on the table but the deal is off." Any chance of a meaningful "V shaped recovery" is now toast. At best we have "the square root recovery" as stated so beautifully by the beautiful Erin Burnett in her CNBC days. Now the real tail risk emerges: "state and local governments." unfortunately "this isn't rocket science." no amount of math can create a taxpayer...and TomaTaxpayer is still in prison...death row it would appear. And since "paying taxes is a moral act" ultimately "trying to force it only makes it worse." Not that i'm not all for "borrowing 100 billion a week to pay for everything." Borrow away!

Tue, 05/15/2012 - 01:18 | 2425949 sharkieboy
sharkieboy's picture

First MFG , now this. The masters of the universe are not looking so smart after all. Few manuouver by benny Helicopter  and ECB air monery forces and their hedging tricks are flying strait to the garbage. All these models  have no chance of working in a collapse situation which will unfold very soon. It is too many varible to  calculate. get small or get crush.

Tue, 05/15/2012 - 01:24 | 2425962 sof_hannibal
sof_hannibal's picture

don't forget that Dimon pleaded with Benny B. for 29 billion dollars-- and wants free money from the FED... so the FED blowing up banks needs to add-- the banks also asking the FED to blow them up as one is innocent here; be careful what you wish for is the moral

Tue, 05/15/2012 - 01:48 | 2426005 4D
4D's picture

Brilliant breakdown. You have to call them:

JP Morgamma

from now on!

Tue, 05/15/2012 - 02:02 | 2426025 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

To me, this is all about SIZE. Instead of the big five banks we should have about 30 different major players, each with a slightly different book and a slightly different view on the markets. It's not the risks that matter, it's the concentration of risks.

Tue, 05/15/2012 - 02:12 | 2426033 Clashfan
Clashfan's picture

Thanks for a good piece ZH.

For them it's all blow and hookers, yachts, gambling with other folks' money, and a totally different reality than the rest of us.

They do not know ghetto songs.

Tue, 05/15/2012 - 02:14 | 2426036 Clashfan
Clashfan's picture

"You don't need no silicone

to calculate poverty."

Tue, 05/15/2012 - 02:19 | 2426039 pissing_excellence
pissing_excellence's picture

Capsule material, because you lost me after delta balancing, you win. You read like stereo instructions. Gnite bitchezzzz

Tue, 05/15/2012 - 02:25 | 2426042 palmereldritch
palmereldritch's picture

'Tail-risk' hedge... a Promethean task

Tue, 05/15/2012 - 03:05 | 2426071 youngandhealthy
youngandhealthy's picture

JPM are arrogant and JD should leave office, now. The following line from Tylers post is all that needs to be said:

"...The actions of the Fed/ECB/rest-of-world with massive and unprecedented easing efforts was perceived by the market as a tail-risk crushing event - i.e. they removed the systemic risk from the system once again..."

The key word is again.

DONT FIGHT THE FED OR ANY OTHER CB! (that is a known-known for decades boys and girls)

If you think you are smarter. Go screw yourself.

Tue, 05/15/2012 - 03:28 | 2426077 jmcadg
jmcadg's picture

The FEDs actions may have forced the likes of JPM to take on greater risk, but do you really think they were being prudent before this. Sorry but that part is a convenient smoke screen for incompetence.

Umm I believe 20008 happened before QE started. Suck it up Dimon.

Tue, 05/15/2012 - 04:00 | 2426093 GS21A
GS21A's picture

To quote a pilot I know, "The more moving parts you have, the easier it is to bring it down."  TPTB have made a very vulnerable system balanced on a pin point.  Somebody pulls the right pin, and it will all unwind.

Tue, 05/15/2012 - 04:29 | 2426108 Tall Tom
Tall Tom's picture

The truth is that most math equations are without any known solution. The problem is that the modeling is done with Differential Equations...hence Derivatives. In order to obtain solutions to problems general form are unsolvable Mathematicians set up Boundary Conditions. This allows for solutions provided that the boundaries are not violated. If the boundaries are violated the models tend to give spurious results.

Guess what??? The boundaries were violated.

So since IG9 is presently undervalued how do you buy IG9 and profit from JPMs fuck up?

Tall Tom
I Cor 13

Tue, 05/15/2012 - 06:41 | 2426144 Treason Season
Treason Season's picture

Carroll Quigley calls the Dawes Plan "largely a J.P. Morgan production." The J.P. Morgan Group set up the loan to I.G. Farben, which created Hitler. 'Without the capital supplied by Wall Street, there would have been no I.G. Farben in the first place, and almost certainly no Adolf Hitler and World War II."

Tue, 05/15/2012 - 06:49 | 2426152 francis_sawyer
francis_sawyer's picture

23) Numbers 1-22 above not really a problem because we're really just playing with printed Bernanke bucks anyway, & the losses will eventually get shifted to hapless taxpayers...

Tue, 05/15/2012 - 07:00 | 2426162 rawsienna
rawsienna's picture

Rumor is that BOEZ WEINSTEIN was on other side of trade and leaked the story to a friend at BLoomberg/WSJ to get Fed involved.  If so, that is not so great but then the question is did he add to the trade after he knew a story would be leaked.  

Tue, 05/15/2012 - 07:20 | 2426181 symphonyMusic
symphonyMusic's picture

Excellent and broadly correct. Tweets highlight correctly that no consideration was given to the hapless homeowner forced to continue to pay exorbitant spreads that were, and remain, not justified by the cost of funds but are purely imposed by the OCC banks attitude not reflective of the public trust associated with their receipt of a banking charter. "Too big to function," should be the recognized reality.

Tue, 05/15/2012 - 07:19 | 2426183 insanelysane
insanelysane's picture

But the guy on Bloomberg TV just said we still don't know what happened at JP Morgan to get this loss.  Must trust MSM and not ZH, must trust MSM and not can vaporize!

Tue, 05/15/2012 - 07:21 | 2426188 EclecticParrot
EclecticParrot's picture

It seems that 'pros' systematically over-focus on tail risk without properly acknowledging the risk to their own (very human) 'tails'. 

Ego prevents them from hedging their own leptokurtic (i.e., pointed head, fat ass) careers.

Tue, 05/15/2012 - 07:35 | 2426201 Jack Sheet
Jack Sheet's picture

Frigging lunatic asylum.

"What purpose was served? No new loans were created. No new jobs were created. Absolutely nothing of value to society was derived from this trade. At best, it was a form of gambling for the whale and his colleagues. Next time they should go to Las Vegas and skip the drama." JG Rickards

Tue, 05/15/2012 - 07:35 | 2426205 CPL
CPL's picture

It may be time to kick over Twitter and keep it down like the Playstation Network.

Tue, 05/15/2012 - 07:42 | 2426215 tradewithdave
tradewithdave's picture

... or, in a single tweet Paulson tells Dimon he only has to put down 10% cash on the $2+ billion purchase of what is a $10+ billion Bear Stearns value.  In exchange for this crucial confidence-boosting step and the avoidance of the bank run, they get four years to pay the bill while Gary delays the swap ruling, Blythe unwinds the short silver and Bart combs his mullet.

That's a bit simpler and no fancy charts needed.  What of the Volcker Rule you ask giving the rest of the industry chicken pox?  Not if you've been vaccinated like JPM... for the balance of the TBTFB (Too Broke To File Bankruptcy) its off to the financial quarantine equivalent of a FEMA camp while preparations are underway for the underwater mortgage pre-election jubilee of the bank carcases.

Tue, 05/15/2012 - 08:19 | 2426278 The game
The game's picture

Hey I have a question... JPM and the 2 billion $ loss how is it PM are still diving down. And when does the short naked selling of silver blow up in JPM face?

Tue, 05/15/2012 - 08:21 | 2426286 doggis
doggis's picture

hmmm.....very very curious and suspicious timing with regard to the vatican bank connection [that is jpm closing the accounts of the vatican bank in march of 2012]

my bet ~ money was laundered from jpm to the vatican bank before jpm's confession. In the curffufal loss numbers are tossed around with no real accounting, which balances out the laundered unbalances.


distraction is a powerful tool to a bank!

Tue, 05/15/2012 - 08:22 | 2426288 LawsofPhysics
LawsofPhysics's picture

End the damn Fed already.

Tue, 05/15/2012 - 08:44 | 2426358 insanelysane
insanelysane's picture

That is crazy talk!  The FED are the only people in the world keeping things together. </sarc>

Tue, 05/15/2012 - 08:31 | 2426314 foxenburg
foxenburg's picture

Too clever for his own fucking good Ho hum. Win some. Lose some

Tue, 05/15/2012 - 08:33 | 2426321 insanelysane
insanelysane's picture

The thing I don't understand is when the MSM experts are saying that if we eliminate these trades we are killing the banks ability for big returns.  Don't hedges already kill the ability for big returns???  What am I missing?  If I think one team is going to win and place a bet on them to win.  I make money if they win.  If I hedge and bet some lesser amount on their opponent, if my team wins I win less and if they lose, I lose less.

Tue, 05/15/2012 - 08:45 | 2426345 the not so migh...
the not so mighty maximiza's picture

Very good article, I don't understand the angles on some points.  I actually watched Charle Rose last night ,  Steven Rattner, mr bailout asshole stated simply JPM gambled the US economy would be doing better and they lost.  I was surprised an obamabot would say that.   This article pretty much gets to the sausauge making aspect of it.   My conspiracy side of me thinks JPM might have been hacked and they will never admit to it.


Tue, 05/15/2012 - 08:45 | 2426362 insanelysane
insanelysane's picture

The obamabots are in full swing because they want Dimon in Timmy's position when Timmy retires after the election.

Tue, 05/15/2012 - 08:48 | 2426369 the not so migh...
the not so mighty maximiza's picture

Dimons credability is shattered now i think.

Tue, 05/15/2012 - 09:04 | 2426408 buzzsaw99
buzzsaw99's picture

yeah but being secretary of the treasury is a great tax dodge. ask skanky hanky.

Tue, 05/15/2012 - 08:54 | 2426364 Monedas
Monedas's picture

Monedas' truths of life:   1. Socialism will never matter how many times it's tried !  2. Gold will always be valued more than a Socialist's daydreams !  3. Islamists will never construct a peaceful, democratic, tolerant Capitalist society ! 4. Negroes will never score well on computer programming aptitude tests ! 5. It's just a matter of time before South Africa descends into the Zimbabwian Abyss !  6.  Stoning and necklacing parties are on the rise in Soweto ! 7. No matter how many times Socialism fails....Capitalism will always be blamed !  8. The mob will always vote to steal other people's money....kind of a " financial stoning" or necklacing party !     Monedas    1929    Comedy Jihad Obama's Economic Wunder Wirtschaft....While You Wonder And Wait You Get The Shaft !      

Tue, 05/15/2012 - 08:56 | 2426390 buzzsaw99
buzzsaw99's picture

If they weren't TBTF they couldn't throw their weight around like that.

Tue, 05/15/2012 - 08:59 | 2426396 Monedas
Monedas's picture

Obama/Biden   2012    Four More Ears !!!     Monedas   1929    Comedy Jihad Don't Change Ears In The Middle Of A Scream !

Tue, 05/15/2012 - 09:07 | 2426416 orangedrinkandchips
orangedrinkandchips's picture



please help me out a bit as the article was great but NOBODY understands this shit.....


1.) they have a long, borning position with the excess cash from deposits(liabilities) and loans they make. They take this cash and invest it in treasuries, hopefully.

2.) they reached a bit too far, bought MBS and had to hedge it .....long original position, shorted it to hedge.

3.) then they went long to hedge the original short position.....


Of course I know from painful experience this is emotional trading in huge volume in an illiquid market. On top of that these positions seem to be profitable in the short term but with an illiquid market you cant get out......


hedge of a hedge....

gambling! That is what insurance is....plain and simple......

Tue, 05/15/2012 - 09:11 | 2426440 cooperbry
cooperbry's picture

"but we have been asked again and again for a simplification. So here is our attempt"


If this is the simplification, I'm glad I still have my day job...  :)

Tue, 05/15/2012 - 09:13 | 2426441 cooperbry
cooperbry's picture

"but we have been asked again and again for a simplification. So here is our attempt"


If this is the simplification, I'm glad I still have my day job...  :)

Tue, 05/15/2012 - 09:34 | 2426485 Bill Shockley
Bill Shockley's picture

In an effort to understand hedging I imagine a well greased tetter totter, delta is the fulcrum. Am I doing OK?

My fuck buddy and I weigh the same and we are both putting money in our pockets each time we touch the ground.


Oh this is so much fun!!!


My buddy grabbed so much money I am way up in the air so she slides off and lays on her back while I hit the ground.


No problem, I just lay there cause she crawls over and sucks me back to life. I lost my pants in the fall.


She slides on.

It's a great life.


All that paper laying on the ground cushioned my fall.

Everything feels so good.



Tue, 05/15/2012 - 09:26 | 2426507 ZeroPower
ZeroPower's picture

Awesome perspective into the JPM trade ZH team

Tue, 05/15/2012 - 09:38 | 2426569 FreeNewEnergy
FreeNewEnergy's picture

I admit to understanding about 2% of this article, but my takeaway is long Volker Rule, long ammo and start about 50 new tobacco plants in my garden.

Somebody should KISS Jaime Dimon (Keep It Simple, Stupid!)

Tue, 05/15/2012 - 09:40 | 2426594 Clowns on Acid
Clowns on Acid's picture

Great article Jamie. Thanks for finally coming clean.

Tue, 05/15/2012 - 09:41 | 2426603 levelworm
levelworm's picture

Can someone tell me how am I supposed to understand all these technical nouns, for example can you guys recommend some books/articles? From my understanding, JPM hedges B with A, and because of the central bankers' flooding, A went to the wrong way and becomes too wrong for the model, so JPM was forced to hedge A with an even larger C (honestly I don't understand what A,B and C are), which eventually went wrong again as the ugly head of risk rose in the last couple of months. Now JPM's position on C is so large that even a few bips' move would imply big losses, and the mkt senses this and tries to open the wound wider and deeper by pushing for larger movement of C.

Tue, 05/15/2012 - 10:06 | 2426717 Monedas
Monedas's picture

Buy the shit (PMs) and shut up !  This myopic examination of the minutiae of the unraveling of the first world wide Ponzi Americana is fascinating......but it doesn't change the outcome......the Newtonian law of gravity trumps Keynesian flights of fantasy !   "Men will eventually use every weapon they invent !  Men will eventually use every scam they invent !"      Monedas   1929     Comedy Jihad Circle Jerk Of Life

Tue, 05/15/2012 - 10:12 | 2426767 Monedas
Monedas's picture

"The most reliable constant in human the eternal Lust for the unearned !"      Monedas    1929     Comedy Jihad Socialism "Capitalizes On" And Codifies Lust For The Unearned !

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