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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Thu, 05/10/2012 - 22:00 | 2415955 GeorgeHayduke
GeorgeHayduke's picture

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

Because it's all manipulated. They can't let silver run or the gig is truly up for the douche bags.

Thu, 05/10/2012 - 22:33 | 2416043 Prometheus418
Prometheus418's picture

You're all welcome. *sigh*

Kind of like washing the car brings on a thunderstorm, I locked in the terms of sale on a good-sized handful of silver right before this news broke.  Had to do it to free up some liquidity, figures it would be right before JPM takes one in the nose.  

Well, you win some, you lose some- at least my stash is still 85% intact.   Going to be hard to make that trade tomorrow, but seeing as how I'm not a bankster, I suppose I'll have to deliver the shiny.  At least it's going to a good private home with steady hands, and not back into the market.

Fri, 05/11/2012 - 02:02 | 2416354 putaipan
putaipan's picture

ah... if for no other reason than to support max's impersonation of jamie as an overgrown tapeworm ..... go buy an ounce tommorrow.

that goes for all you chinese barbarian relic collectors, indian'too poor to buy gold' untouchables , dinar investing pious folk ,and God fearin' libertarians reading zh...tell a friend- go buy an ounce tommorrow.

Fri, 05/11/2012 - 00:14 | 2416224 spooncutter
spooncutter's picture

im all about the monster boxes as well. SO glad i got some at $49/oz too, im all about sticking it to JPM at every opportunity

Fri, 05/11/2012 - 01:28 | 2416298 TraitorsHang
TraitorsHang's picture

I've got some at 49. Just remember that if you've kept the pressure on, you've probably alos got some at 15 (or lower).

Stack. Go boating. Pray that we all lose our shirts because of how comically wrong we were. Know that we won't.

Fri, 05/11/2012 - 02:06 | 2416361 jomama
jomama's picture

so jelly.

Thu, 05/10/2012 - 21:57 | 2415939 Decolat
Decolat's picture

Don't mind if I do.

Thu, 05/10/2012 - 22:04 | 2415965 sof_hannibal
sof_hannibal's picture

occupy SILVER

Fri, 05/11/2012 - 03:09 | 2416412 tocointhephrase
tocointhephrase's picture


Thu, 05/10/2012 - 22:19 | 2416006 WmMcK
WmMcK's picture

I'm in for 1k tomorrow, all Ag. And a couple of oz of PT when/if it touches 1450.

Thu, 05/10/2012 - 22:23 | 2416014 Essential Nexus
Essential Nexus's picture

But I want to take advantage of the arbitrarily low price.  :(

Thu, 05/10/2012 - 23:03 | 2416124 Lost Wages
Lost Wages's picture

I was gonna lay off the buying for awhile and build up some more cash, but I'm down for $400-500 worth of silver tomorrow when the local shop opens. Feel free to unleash the ol' 3AM raid tonight, JPM, maybe I can squeak in one more ounce.

Thu, 05/10/2012 - 23:06 | 2416129 Gooseleg
Gooseleg's picture

30 more oz on the way.  Too bad I lost the rest of my stack in a terrible boating accident.

Fri, 05/11/2012 - 00:51 | 2416266 mt paul
mt paul's picture

get a bigger boat...

Fri, 05/11/2012 - 02:07 | 2416365 putaipan
putaipan's picture

...was gonna make my first boat joke. but really, i don't get it .... i just give all of mine away to friends. great gifts.

Thu, 05/10/2012 - 23:10 | 2416135 R3VOLUTION
R3VOLUTION's picture

I'll join you.  BTFD!

Fri, 05/11/2012 - 01:10 | 2416280 Bizaro World
Bizaro World's picture


Unfortunately, I see JPM surviving relatively unscathed but you have to commend Max/Paul/others for trying. Meanwhile, opportunity to add more PM hedge during a dip.

Fri, 05/11/2012 - 01:17 | 2416290 TraitorsHang
TraitorsHang's picture

I blew my load at 30.50. Will commit to an additional 10oz.

Fri, 05/11/2012 - 01:56 | 2416348 jomama
jomama's picture

i am supposed to pick up 100oz. this coming thursday... does that count?!

Fri, 05/11/2012 - 04:42 | 2416454 DutchDude
DutchDude's picture

2x 1 kilo umicore andorra coinbars... headin' my way >:)

Fri, 05/11/2012 - 08:22 | 2416698 n8dawg84
n8dawg84's picture

27 ASE and 4 Roosevelts!

Fri, 05/11/2012 - 09:29 | 2416952 EFNuttin
EFNuttin's picture

Looks like you have gotten a lot of readers on board.  How much silver do you plan to unload on them?

Thu, 05/10/2012 - 21:29 | 2415834 The trend is yo...
The trend is your friend's picture

Daughter: "Daddy, what's a financial crises"

Jamie Dimon: "it's when daddy gets drunk and gambles a little too much with other peoples money dear"


An oldie but a goodie

Thu, 05/10/2012 - 21:44 | 2415897 knukles
knukles's picture

Daughter:  And how's that different for a crash, Daddy?

JD: A Crash is when we load 12 1/2 tons of the Treasury's gold on the Gulfstream and fly to the ranch in Paraguay with the Bushs, honey.

Daughter:  Can I get a horse, Daddy?

Thu, 05/10/2012 - 22:46 | 2416083 fuu
fuu's picture

el fuego

Thu, 05/10/2012 - 23:39 | 2416172 vamoose1
vamoose1's picture

now that  rocks

Thu, 05/10/2012 - 21:30 | 2415835 nmewn
nmewn's picture


Thu, 05/10/2012 - 21:37 | 2415859 LetThemEatRand
LetThemEatRand's picture

We can certainly agree about who is a COMPLETE FUCK.  Jamie Dimon comes to mind. And his banker ilk.  FUCK THEM.  Twice.  Or Thrice, if that's a word.

Thu, 05/10/2012 - 21:58 | 2415943 Marginal Call
Marginal Call's picture

A guy like me from the west coast doesn't understand how a guy like Jamie can just walk around.  What's wrong with New Yorkers?  If he lived in my city, city busses would jump curbs at the sight of him, semis would run red lights seeing him in the crosswalk, and waiters at fine restaurants would dump super aids infested dressing in his salads.


If I saw him on the streets, I would run him down.  And a jury of my peers would find me not guilty because I suffered from the first ever case of post partum depression discovered in a middle aged childless male.

Thu, 05/10/2012 - 22:04 | 2415971 Cursive
Cursive's picture

@Margin Call

Where's is this?  Oakland?  Because most of the Left Coast I've visited is very aloof and leave-and-let-live.  L.A. and San Fransisco are extremely corporatist.  Admitedly, I don't know anything of the Pacific NW except for MSFT, flannel and disillusioned grundge rock.

Thu, 05/10/2012 - 22:18 | 2416002 Marginal Call
Marginal Call's picture

We gave you Nirvana, Jimi Hendrix, Boeing, and we hate everything.  Bill Gates has to give away half his money just not get called out for the piece of shit he is.  Scott Bezos had to drive a Toyota.


If you are over 40, you remember when plumbing was new.  We are like another planet.

Thu, 05/10/2012 - 22:52 | 2416097 GMadScientist
GMadScientist's picture

How many times are you people gonna rebuild that shithole on top of the last fuck-up? 

An entire town built and paid for by whores!



Thu, 05/10/2012 - 22:57 | 2416111 GMadScientist
GMadScientist's picture

You should've left the airport hotel.

Watts '65, SF '79 (Milk), LA '92,...

When were you born?

Thu, 05/10/2012 - 22:11 | 2415986 Dr. Engali
Dr. Engali's picture

Hmmmm... We in the Midwest were kinda wondering the same thing about a guy like governor moonbeam. He must not go out in public.

Thu, 05/10/2012 - 21:28 | 2415826 xela2200
xela2200's picture

So are we to understand that hedge funds will take advantage of this to fleece JPM for whatever they are worth?

Thu, 05/10/2012 - 21:37 | 2415862 Desert Irish
Desert Irish's picture

Yes but as long as they are not persuded to do otherwise......and that's the kicker.

Thu, 05/10/2012 - 22:35 | 2416045 Acorn10012
Acorn10012's picture

Here's hoping the hedgies eff Jamie and the Dimons straight to hell.

Thu, 05/10/2012 - 22:35 | 2416046 Chaffinch
Chaffinch's picture

Isn't there some kind of professional courtesy thing where sharks avoid eating other sharks? - sorry, no, that's lawyers isn't it - carry on guys - grind them into the ground and then just keep on going.

Fri, 05/11/2012 - 00:40 | 2416255 Nobody For President
Nobody For President's picture

Like Jamie did with LTCM? or Bear Stearns?

The Bear folks have got to have some grim grins about now, as in "How's it feel, you mother fucker?"

Be careful who you shit on on the way up...

Fri, 05/11/2012 - 07:16 | 2416574 youngman
youngman's picture

I bet the Hedges are working overtime to find out where these bets are placed......and I hope they rake them over the coals...

Thu, 05/10/2012 - 22:03 | 2415964 Jack Burton
Jack Burton's picture

Jamie Dimon brings to mind some of the old saying we had when I was in the military many years back. Our language was pretty extreme! Thinking of Dimon just makes me want to say to him "Eat Shit and Die Mother Fucker!"

This scumbag fuck has no reason to exist. Look at those financial engineering positions that have left them up to their lips in shit!

Seriously, what is it all about. What has that sort of thing got to do with the real economy. People who work for a living, or build things or develop high tech or manufacture real things, they don't deal in this exotic CDS crap and all these out of control scheme to skim money out of the economy.

Dimon! Die mother fucker, die so we can all piss on your useless grave.

Fuckwit Dimon. Financial engineer in hell buddy!

Thu, 05/10/2012 - 22:13 | 2415992 LetThemEatRand
LetThemEatRand's picture

I am not a religious person but I believe in good and evil.  
There is day.   There is night.  There is nice.   There is mean.  There is helpful.    There is fuck you you fucking leach, I am rich and go fuck yourself! 

Dimon is fucking evil.


Thu, 05/10/2012 - 22:39 | 2416055 Chaffinch
Chaffinch's picture

I feel you're still bottling stuff up Jack. Let it all out - we don't mind the occasional profanity - we are here to listen.

Fri, 05/11/2012 - 01:16 | 2416288 The Alarmist
The Alarmist's picture

I wouldn't take the trail unless this MF was walking point.

Thu, 05/10/2012 - 22:10 | 2415985 WmMcK
WmMcK's picture

Best post with high "fuck" index.

Fri, 05/11/2012 - 03:22 | 2416419 Ratscam
Ratscam's picture

reminds me of the lyrics of Tupac song hit em up

Thu, 05/10/2012 - 22:30 | 2416035 raki_d
raki_d's picture

Fuckin Cockroaches

Thu, 05/10/2012 - 22:41 | 2416064 Thunder_Downunder
Thunder_Downunder's picture

Another take away for budding traders... 


You can have a perfect quarter, a perfect year... and still blow from being stupid...

Thu, 05/10/2012 - 21:32 | 2415846 reTARD
reTARD's picture

Oh NO!!! What would this do to all those naked paper shorts on silver and on gold shares? LOL

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