Is JPM Staring At Another $3 Billion Loss?

Tyler Durden's picture

"[The trading loss] plays right into the hands of a whole bunch of pundits...."


                                                         - Jamie Dimon

There are a lot of moving parts in the Dismal tale of Dimon's demise. The starting point is that Bruno Iksil in the JPMorgan CIO Office, under the premise of hedging the bank's credit portfolio's tail risk had placed various tranche trades (levered credit positions with various risk profiles) in the only liquid tranche market that still exists - CDX Series 9 (an 'orrible portfolio of credits with an initial maturity at the end of 2012). These positions were low cost  (steepeners or equity-mezz) but needed a certain amount of day to day care and maintenance (adjusting hedges and so on). As the market rallied, the positions required increasing amounts of protection be sold to maintain hedges (akin to buying into a rally more and more as it rises). His large size in the market left a mark however that hedge funds tried to fix - that was his index trading was making the index extremely rich (expensive) relative to intrinsics (fair-value).

This is the 10Y IG9 credit index (dark blue) and its fair-value (light blue) and the difference or skew (orange). What is clear is that the index remained massively rich to its fair-value through this period (red oval) and it was not until the last two months or so that the skew (red arrow) began to compress as perhaps Iksil got the nod and more and more people realized the arb...(or understood from where the technical pressure was coming in the index rallying)...

Hedge funds began to try to arb this position and got frustrated at the lack of convergence -  and this is how we initially got to hear about Bruno Iksil - the London Whale - since those funds suggested someone was 'cornering' the index market in credit.

Critically - this is akin to looking at the 500 names in the S&P 500 - weighting them and seeing the S&P 500 index should trade at 1200 but it is trading at 1400 so you sell the index 'knowing' that the index is mispriced - (this never occurs in stocks since they are instantly and everywhere arbed between the index and its components - but can occur in credit because of illiquidity or in this case flow - what we call 'technicals').

This was very evident when one looks at the net notional being soaked up by the Whale and this 'hedge' position had clearly grown extremely large as it became a momentum trade not a hedge (at which time we suspect Iksil started to lose control). In early April, as news of this broke across the market, the credit and equity markets were beginning to quiver again at European contagion and US macro data and as a proxy for the volatility JPM must have been feeling we can see very significant (2-3 sigma) swings in the credit index they held. This would more than likely have triggered a risk manager to come along and look over the trader's shoulder - suggesting humbly that he exit/hedge/don't panic.

This is IG9 10Y spreads (upper pane) and their rate of change (lower pane) - (h/t @swaptions for idea) and as is clear the 3-sigma multiple day move likely scared a few risk managers (and Iksil) into fessing up...

Evidence from the HY market suggests that the trader used more liquid on-the-run indices to hedge as the spread of the HY18 credit index blew notably wider relative to intrinsics and net notionals dropped modestly. The market calmed down a little and it appeared from net notionals and the index skews that he tried again last week to unwind some more of the huge position that had clearly tripped various risk limits and VaR controls. This is where we find ourselves now - the net notionals remain huge (and implicitly on JPM's shooulders), his lack of selling has left the credit index maybe 20bps rich to where it might trade given its rough correlation with the S&P 500 and this would imply at least $3bn of losses already in addition at fair-value.

As is evident, IG9 credit index and the S&P 500 have moved in a very correlated manner - and IG9 net notionals (the amount outstanding in IG9 CDS) has risen alongside these moves as JPM built a bigger and bigger longer and longer credit position. The red vertical arrow shows the current dislocation if one assumes the cessation of Iksil's unwind efforts stalled IG9's selloff - which is the $3bn loss that remains to be seen and the black dotted line is an indication of the kind of notional unwind that would occur - which with a market moving as it is - would be highly disjointing.

Of course, the situation is far worse because 1) any efforts to unwind such a huge position will lead to the market yawning wide and swallowing him in illiquid bid-ask spreads; and 2) the rest of the world knows their position - so why would the hedge funds not push their position. Perhaps this explains why JPMorgan's CDS has remained relatively wide while its exuberant stock price shot up on stress-test ebullience - only to plummet back to CDS reality this evening. Critically, JPM will need to use whatever method they can to hedge this now over-hedged and over-long position - which likely means credit instruments such as JNK, HYG, HY18, and IG18 will all get their share of strange attraction as the trader mispriced not just the basis risk (the volatility between the hedge and its underlying) but the attraction of running with a trend when you have a bottomless pit of money to cover it - until now.

It is already evident in the on-the-run liquid indices - HY18 for instance has exploded wider twice now - in line with the net notional reduction and hedging moves from JPM's IG9 position...

This chart somewhat relates to the IG9 skew chart above in that it represents how far above 'fair' the spread of the index trades relative to the underlying names - the spikes show that there was huge technical demand for the index protection relative to the underlying risk of the portfolio.

and perhaps there was already concern in the market with regard JPM's counterparty risk or exposure from hedgies' trades as CDS has been far less exuberant than stocks...


Of course noone knows for sure what exact positions Iksil had on - though it is clear what hedging he needed to do to manage his hedges. As Peter Tchir ( @TFMkts ) noted this evening - perhaps this mark-to-model irregularity is what the Fed discovered and gathered all the banks last week to ascertain just who has what exposure to whom? As we tweeted earlier, perhaps Iksil just got carried away - and please understand that while CDS do indeed provide leverage, so do many other financial instruments - it is not the instrument that caused this - it is the trader as "you don't hedge risk when you bet on momentum continuing you idiot!"

Addendum - VaR is almost entirely useless as a risk statistic in regard to the kind of highly non-linear positions that we are talking about here and so the doubling of JPM's VaR suggests the tail-risk (or conditional VaR) is considerably larger.

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Jacque Itch's picture

This is so f'n great.  I predict this is the Bear Stearns moment from Summer 2007.


LetThemEatRand's picture

Fuckin' chaos.  The friend of the fucked and the damned.  See you in Hell, Jamie fucking Dimon.  Fuck you you fuckity fuck.

AlaricBalth's picture

The lights are burning bright tonight at 33 Liberty Street. Dudley is trying to determine what the hell happened and who else has similar exposure to this debacle.

knukles's picture

Geez that's generous.
Dudley hisself wouldn't know a CDO from a CLO from a CFO from an IdontNo if one of 'em pissed in his shoe while he was playing with himself.

At least Dimon has Blythe who is a wiz bang tried and seasoned pro at handling other people's hedges when the they turn into real money nightmares migrating mysteriously onto JP's own books.  Hedges, other people's hedges, mind you and your own fucking business.

But never fear.  The book is run out of London.  No grasshoppers, not London as in the Disney failed reincarnation nothing like the glorious civil past of the '60's that some of us ex-pats still long for, but the City, where infinite rehypothication and no return of other people's monies ever takes place, Peter Pan. 

And soothing all open wounds, Paul Krugman'll publicly speak in some obtuse evil breathed manner seemingly vilifying the banksters while pleading for more QE to ensure the survival of the monied classes and trickle down Obamanomics, while Ben opens the Discount Window late at night for a Red Light Whore's Special at Attractive Rates for His Favored TBTF Owners. 

Or else they'll really fuck up that other client's hedge in the gold and silver markets and make that Other Asset category on the FED's balance sheet into Other Fucking Labilities, real quick.

The Alarmist's picture

Depends on whether we are talking log-normal or log-stable distributions ... tails are a lot fatter than most people think.

fuu's picture

I wonder if Jamie really meant to say, "We are not going to panic or do anything stupid." Did he really want to be the first one to use the term "panic"?

The Alarmist's picture

The first thing they did wrong was to talk to anyone about anything.

First rule about Fight Club ....

ndotken's picture

JPM is only in trouble because they don't have another MF Global from which they can steal client funds to cover proprietary trading losses.

flacon's picture

It's not nice to pick on bankers. Jamie Dimon told me so! Besides, if they weren't doing God's work... who would? /sarc



Stop Picking on Bankers, JPMorgan Chief Says



“We try to do the best we can every day,” Mr. Dimon said during a panel discussion.


Mr. Dimon said at the World Economic Forum that he was sick of “this constant refrain — bankers, bankers, bankers.”


PS. Dimon, you filth. Bring you face right here to me and let me tell you what I really think of you!

Oh regional Indian's picture

Feels funny though that JPM would be one to shake this hard. We are all sure they will be bailed out, why so much noize? It's all thsi noize that has me looking into all different corners, askign what is it that they are hiding?

Something already happening is getting worse or soomething big is upcoming. Otherwise, 970 mil to absorb a single notch downgrade is chump change for a JPM. 

Even the notional/real risks/losses issue is not IT, because IT has not been decisively cleard (ie. is notional real?).


Something much bigger stinks... Is China really crumbling?

Why is Putin missing the G8? 

Is the Phillipines the center of the geo-political stress that has been building? Russ-ina vs. the rest/west?




delacroix's picture

maybe they're looking at a failure to deliver, on silver contracts. the derivitives, guarding their shorts, are going to get very pricey, and they just keep shooting themselves in the dick. they have adversaries, that they have fucked in the past, and no one plays nice, when the stakes are this high.

DeltaCharlie's picture

Wait a goddamn minute! Did not the Fed today say that US banks are in much better shape?

Poker players every last one of them!!

GetZeeGold's picture




Just a flesh wound.....bailout XVI imminent.


Oh regional Indian's picture

Yup Dela, we all remember what happened to Bear. But these are even weirder times. And this is JPM.

Very very strange. And if it is silver....

Take a read of this:


Escapeclaws's picture

Unfortunately, he is so hard to understand. Does this make sense to you?

"Recall that basis is the spread between the nearest futures price and the cash price. The grain elevator operator buys cash grain during the harvesting season to fill his elevators to the brim. He tries to buy cash grain at the widest possible basis (known as carrying charge). He is planning to sell it when the basis is getting narrower. His profit is just the shrinkage of the basis. What is the explanation of this peculiarity? When the grain elevator operator buys cash grain, he sells an equivalent amount in the futures market. He must hedge his inventory because the capacity of his elevator storage space is so huge that even a minor fall in the grain price will wipe out his entire capital, if his cash grain is left unhedged."

Oh regional Indian's picture

Escape, all he has done there is explain the very basis (!)  and reason for what it means to hedge? He writes a little circularly (he is hungarian after all).

From my understanding, what he is hinting at is that if properly Hedged, using the word in the correct context, it's trading on basis that keeps the warehousers, (liek a CME) functional, which keeps the whole system chugging along.

Any experts?



Oh regional Indian's picture

Welcome Husk, I think Fekete is the sharpest Monetary theorist alive currently.


Jendrzejczyk's picture

Very difficult to wrap the brain around that one, but many of his other writings aren't so impenetrable.

JOYFUL's picture

Bro, if yu ever tried to make a livin outta the old-fashioned [barbarian!?!?]style produce n sell pre\post-reality style economic system, Feteke aínt hard to read, he's hard to refute...

man was exiled to the CodBanks Kingdom of NFLD, were's da boys was still flingin fish into flash freezers when the rest of Norte Merika had already descended in a "service economy" hell which Dante described so poignantly well five centuries before us...jus close enuff to the last bit of real economic action to get the gist of what real tings was all aboot!

In Merik astan, the last holdouts of the production as value formula, the old guard grain growers of the Great Midwest went down in November with the Corzine Corporal n CME Company. just like the last of the Louisiana shrimpers[in the Great Gulf golpe] before them.

This is it folks...what ZH was born for: that scion of the wealthy moneychangin messianic Sabbatean Smyrna\Salonikan, Jamie Papademetriou\not!\ Dimon is goin down like Capt Smiths' unsinkable cruiser, right before our matter how many bought n paid for congressmen\senators\ event that will prove, in retrospect, to have been but the tip of an international style iceberg!

Funny that a post-western Easterner\E'tranger like ORI was the first to sniff n scratch the really real deal that is goin down now, in live time. Congrats to yu, Vivek...yu will be legendary!


dcb's picture

I can assure you that a person with his (dimon's) dgree of narcissistic personality disorder this won't phase him. There people believe they walk on water and are immune to the real world

Jim B's picture




e_goldstein's picture

Sure, by then, his shit was out of the ballgame, so why not?

tekhneek's picture

beautiful knuk. just so damn beautiful.

saulysw's picture

Logged in just to say how much I enjoyed reading that...

Turd Ferguson's picture

me too, though I must admit I only understood about 25% of it.

OldPhart's picture

That's about 24x more than I understood.

blindfaith's picture



And, everyone expects the wonders of government to undrestand.   The SEC, DOJ and the rest are like doctors who get a visit from the pharmaceutical salesman...'it is all good, now go back to sleep, and we will look out for America's best interests and won't do anything bad...we promise this time". 

The governemnt here and in Europe have allowed all this to grow worse than before, and everyone kept their mouths shut inorder to make a few bucks.

disabledvet's picture

"Wall Street gibberish." Zero Hedge specialty unfortunately. The nub of the issue is pretty simple: "is the risk you're taking on the pro growth side or the recession side?" this is a simple choice...on that must be made early since "it will be made often going forward." In other words "bulls and bears make money"...Zero Hedge is a bear and "there lingua gibbera" is oriented towards "impressing those of that ilk." As it is "they have been pretty much completely wrong both empirically and intently." I would recommend more clarity on THAT side of the ledger as well. Having said that "i'm the bull who is disgusted with the American banks" and have felt for some time "these folks will make the same mistake again" (as occurred in 37-38.) Haven't even been disappointed in the PLACE of Criminal Syndicate...let alone the timing. TOO MUCH MEDIA New York. It IS your undoing...and rightfully so. Indeed "the silence from GOVERNMENT is what is deafening" is it not?

RECISION's picture

Don't worry, most of it is a made up language anyway.

Designed to obscure the fact that they are just running the same old tired scams and cons they always have.

They just hope that YOU wont recognize their code words for what they really are.

jeff montanye's picture

there's a lot to what you say.  the banksters do their worst shit with their pants on.  were it not so, the people would be a lot wiser to them.  seems impossible that so transparent a fraud as obama would be able to don the disguise of someone who cares about the rule of law and helping the little guy but get ready for fooling some of the people all of the time:

youngman's picture

I don´t understand it I admit...never will nor want to.....but I would think that after 2008 and the end of the world that the bankers said we were close to...why the hell are they still doing it...what it tells me ..they lied..they still are lying...and they are crooks...bring back Glass- Steagle....and let the gamblers ...gamble without Government backing and more importantly Government money....but make it HFT´s

a growing concern's picture

I believe the term is 'clusterfuck'.

Troy Ounce's picture

I bet they all are spending the night at 33 Liberty:
Corzine, Blankfein, Greenspan, Obama, Summers,
Masters, Madoff, Gensler, Holden, Geitner, Dudley,

Holding hands in a circle, campfire, singing:
"We Shall Overcome" and "Cumbaja, My Lord".

tmosley's picture

Now that's something we can all agree on.

LetThemEatRand's picture

Strange bedfellows, etc.  Fuck the bankers.

I didn't down arrow you.

smlbizman's picture

gravity is puttin on the metals ..

tmosley's picture

Gravity is an interesting name for a vampire squid.

Paul Atreides's picture


Everbody I mean EVERYBODY should go out and buy some physical silver tomorrow, doesn't have to be a lot if we can get everyone on board we can do some damage. With JP Morgan floundering NOW is the time to put the squeeze on those naked shorts.

Second Friday in May? Time to take the silver away!


Start spreading the word tweets have been started, loop in hash tags like #endthefed #ronpaul #crashjpm #crashjpmorgan #silver #gold #commodities #tbtf #jpm

I will commit to a tube of silver maples 25oz.

fightthepower's picture

I have two words for you. Monster Box.

Paul Atreides's picture

I would if I had the funds!!!

It's definitely not going to be my first tube....

Temporalist's picture

I'm surprised the shiney hasn't doubled to $60 on this news.

Paul Atreides's picture

Another good reason to load up tomorrow morning...I tried to get the word out but I am a nobody in the metal space, spread the word!

Chaffinch's picture

At these silly discount prices it would be rude not to buy more. Took another 3kg off the London market. Wish I could buy more!