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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xela2200's picture

Nobody knows the implications at his point. Many factors into play now.

midgetrannyporn's picture

It sounds like a case of all pump and no dump.


Nigger forgot to duck, that's all!


[/Denzel - Glory]

the 300000000th percent's picture

This is going to too big to bail its coming

theTribster's picture

Time to raid customer accounts, that are covertly named customer accounts so I can say we didn't know they were customer accounts, because any account labled as customer accounts cannot be customer accounts - we learned of this financial complexity through the MF Global debacle. What a fucking joke. Nothing will happen to them and they will simply either steal the money or have the fed send a batch over.

If there was only some way to communicate what is happening to the masses....

yabyum's picture

Tribster, That is some scary shit. What is safe? What is not?

Paul Atreides's picture

I seem to remember from the MF global fiasco that customer segregated account funds ARE allowed by law to be gambled on foreign/sovereign debt due to a loophole. So if that's the case they could stick their hand in everyone elses pocket to cover some shitty derivatives bet on Greece and it would be legal. When I learned that I stopped keeping any more then a requiews float in the bank.

The Alarmist's picture

"... customer segregated account funds ...."

Wow, I laughed so hard that I could taste a little vomit when I read that part.

FeralSerf's picture

There is no "safe" anymore.

xela2200's picture

Let's start a blog with all these financial information, so they can discuss it and get educated. Oh wait  Never mind.

Kaiser Sousa's picture

I love how its all unraveling for the sociopath bitch made cocksucking bankers...and gold and silver get clobbered on a day like today which is like every other day over the past 4 years?????????YEAH, RIGHT U BITCH ASS BANKERS.....
buy more stocks, bonds, and debt coupon dollars all u dumb ass brainwashed slaves.....I so love the ever more poignant smell of collapse...justice approaches........

Dingleberry's picture

Did this Iksil fucker think he was a reincarnation of the Hunt brothers? Looks like the "whale" was riding a wave that he created instead of truly hedging. Oh well. Nothing that Blythe and Uncle Ben can't fix....I think. Maybe Iksil can blame his trades on a "fat finger". Seemed to excuse the "flash crash" if I recall. What doubt Sir Jamie will contniue to rail against any sensible bankster regulations.

Cursive's picture


Iksil reminds me a Joseph Jett from Kidder, Peabody (c. 1992).  It's just a video game.  If the balance on your screen gets bigger and bigger, nobody questions anything and you are the toast of trading floor.  Joseph Jett profited from a simple computer glitch, Iksil profited from creating and riding his own wave.  Neither created any value of anything to anyone.

EclecticParrot's picture

With respect to whales, I imagine Mr. Dimon now understands why that nun assigned him to read Moby Dick in the 7th grade:

"Aye, aye! It was that accursed white whale that razeed me; made a poor pegging lubber of me for ever and a day!" 

"Towards thee I roll, thou all-destroying but unconquering whale; to the last I grapple with thee; from hell's heart I stab at thee; for hate's sake I spit my last breath at thee."

delacroix's picture

lee harvey iksil, the lone trader

myshadow's picture

The only real coverage of this as of 5 pm pacific time was fox business.  charlie gasparino was breathless defending what jpm has been doing.  He would step on liz macdonald and spew that a bunch of 'democrats' will be trying to make hay of this opposed to just what the fuck are they hedging, and why are they having to defend that position....what were they messing with and is this yet another chapter of MF global.

fonzannoon's picture

If JPM is down 3% at the close tomorrow and these talking heads are cheering what a great buy it was I give up.

MsCreant's picture

We had a 40% retrace, I believe, during the last crash on PMs.

Then that shit went to the moon, my fellow bitches.

You a PM long? I am. White knuckle time.

yabyum's picture

MsCreant, Yup! Put on your big boy pants and hang on Loretta!

WonderDawg's picture

Hiya, MsC! If metals crash, it might be the buying opportunity of a lifetime.

Dr. Engali's picture

Or we may just end up with free gold as people won't let go of their physical regardless of the paper price.

The Alarmist's picture

Yeah, risk-reward is for us mere mortals.

knukles's picture

No white "Knukles". :)

Nothing has changed.
If anything the whole system has become more concentrated, leveraged, credit sensitive, populated with lower credit quality, the rot spreads way further than a simple Lehman and AIG (think a whole continent, the EU, of banks, insurance companies, pension funds, sovereign wealth funds, etc, ad hoc, Vootie) ...

And, nobody has the wherewithal to sell out and buy back at the right time, regardless of the pabulum, boasting and lack of contrition, even the most vaunted souls populating the herein.

People's own egos will fail them at the most stressful of times.

Gold and silver should be viewed as long term Armageddon instruments.  Which they will be.  History repeats, rhymes, looks similar, too many coincidences.
Put the statements away and don't worry about the PM's

My own suggestion is that better worry about the rest of your portfolios and lock up a stable high quality level of dependable income for a long time. 
This shit ain't goin' away any time soon.
De-leveraging hasn't even yet begun in a serious manner.

Times are going to be tough for a very long while.  And probably without the disappearance of mankind, reform of the financial or political systems.   And if history is any guide, cans can be kicked for a much longer time than most contemplate.

No white knuckles
However, any Knukles is A-OK  :)

MsCreant's picture

"And, nobody has the wherewithal to sell out and buy back at the right time, regardless of the pabulum, boasting and lack of contrition, even the most vaunted souls populating the herein.

You got this. No debate.

Knukles are good. Would love to talk, I don't know how to leave message on the "relationship" stuff. I think we both need to accidentally be here at the same time for it to work. 

Chaffinch's picture

Hanging on for the wild ride MsCreant, but although history rhymes, we won't get an exact replay. All I mean is that no-one here should be thinking they can sell at $29 or $1580 and buy back 35% lower. The roller-coaster is going to be making some climbs up - and maybe it won't scream down as far as it did last time (or even at all, given the pull-back to where we are now) - because quite a lot more people are awake this time around. There has undoubtedly been a lot of collusion between CBs in managing gold's price thus far, but some of the CBs must be starting to develop white knuckles by now, surely? When I look at how seriously some of the smaller CBs (e.g. Mexico) are stacking their gold it makes me think that they are starting to behave pretty much like the ZH stackers - every time the price dips they are going to be tempted to buy at bargain prices, in case some other CB snaffles it and they miss their opportunity. The big advantage they have over ZH stackers is that they can print fiat to buy with (once they have used up their foreign currency reserves). If there wasn't some real competitive pressure amongst the CBs they wouldn't have let the price rise quite so fast as it has done.
I'm not disagreeing with anything you are saying - you and Knukles seem to understand this thing much better than most (and certainly a load better than me!) but I don't want people here to get the idea that the experts here are saying prices are going to follow the same pattern as 2008, because if so some will jump ship and try to climb back on when it is too late.
But it's fair to warn everyone that this is going to be a wild ride - as Knukles says - put the statements away / stop worrying about the fiat price (easier to say than to do!).

roguetraderinchicago's picture

What is it going to take for some administrtion to give a fuck about these bastards using other peoples money to get rich!?!?!


xela2200's picture

Who do you think fund their campaigns?

Why do you think that when they are in front of congress they are laughing?

Some Bloke's picture

When you think of what banking once was - taking deposits and making home loans - it really shows you how f*cked in the head these bankers are these days. 

newworldorder's picture

Dont blame them. Blame the Congress and our Rhodes Scholar President Clinton for gutting financial regulation against the rest of us.

grey7beard's picture

>> the Congress and our Rhodes Scholar President Clinton


How coy of you to completely side step the fact that Gramm-Leach-Bliley was a Republican bill that finally passed after many years of effort by said Republicans and many many millions of dollars in campaign contributions from the TBTF banks.  I applaud you for mentioning Clinton by name, as that shit bag deserves his share of the blame, but I damn you for not instigating the authors, movers and shakers of the bill.  Credit where credit is due, my friend.

SDShack's picture

Actually, the facts are that Gramm-Leach-Bliley was passed with overwhelming DEMOCRAT support in both the House and Senate (votes=House 362-57, Senate 90-8), and signed by DEMOCRAT Bill Clinton only after Chris Dodd and Chucky Schumer (Democrats) inserted a provision into the bill to force all merged bank/financial houses to comply with the Community Reinvestment Act... basically providing low interest mortgages, guaranteed by taxpayers, to subprime borrowers, leading to the massive housing bubble and subsequent economic collapse. So both parties were to blame. The bottom line is the Repubs should never have done anything to repeal Glass-Steagall in the first place, but the Democrats took a bad Repub bill and made it infinitely worse. So if you are going to lambast the "authors, movers, and shakers", you have to include almost all Democrats, especially Dodd, Schumer and Clinton because they are just a liable as the Repub names on the bill.

Chaffinch's picture

Let's not get back on the left/ right and red / blue argument - that's the way they keep us divided and distracted. They are all in the pockets of the banksters, and vice-versa.

Thunder_Downunder's picture

There is some beautiful irony in this. Guess they needed what they stole from MFG afterall.


Wonder if Dimon is regretting the decision to pad profit margins with reduced loss provisioning these last few years...

Cursive's picture


Regrets?  He's Jamie Fuckin' Dimon.  He won't have any regrets until the guillotine.

Thunder_Downunder's picture

Oh yeah.... I gotta get out more. Anthropomorphism fail on my part.

Cursive's picture

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?

I thought momo chasing was encouraged by the Fed.  How the hell is JPM going to unwind this without at least a $3B capital injection (i.e. BENRON BAILOUT) from the Fed?  Or will we all just close our eyes and ignore the lack of Tier 1 capital, a la Spanish cajas?

Larry Dallas's picture

Credit never lies. It really never does. 

How it trades proverbially allows one to look into the soul of any institution.

Cloud9.5's picture

There is blood in the water.   The con is slipping out of the confidence. 

monopoly's picture

We have talked about this for eons. Why would anyone with 1/2 a frontal lobe, invest in any bank for any reason. You do not know what is under the cover. They lie, hide, move numbers around, make mortgages disappear and finesse their books to their liking. They should all be at 0, a ward of the state, with their executives in a maximum security prison with "shared cells".

I will never understand trading a bank. 

IMA5U's picture

Credit should not be linked to derrivatives or ETFs


The next buble forming are the silly high yield bond ETFs



reTARD's picture

Deleted by JPM.

newworldorder's picture

Who can tell us again - how these direvatives are helpfull to the US/World productive economy? Other than "hedging" what usefull purpose do these vehicles provide?

xela2200's picture

Absolutely for nothing. What is interesting is how everybody goes along with it. Few people understood CDS, and yet they were buying them like they were hot cakes. Now they are hedging against instrument that make no sense to anybody. Is there any wonder why all these strategies based on weird formulas go wrong?

reTARD's picture

Why introduce complexity? To hide something.

MsCreant's picture

You friend are poorly named. You did not tard the first time. No "re."

Extremist Tan's picture

We may all be smelling napalm in the morning.

chump666's picture

Incredible analysis ZH.

I suspect that their equity positions will unwind to support the credit position/hedges.

It is 100% going to weaken JPM overall exposure in other words they are going to be very vulnerable to margin calls and lack of liquidity.

Shibumi2's picture

Can someone explain what the hell happened, and what the (non-exaggerated) results are likely to be?


It didn't seem that long ago that a billion sounded like a lot, but now...what's the big deal? Three billion sounds like chump change

xela2200's picture

Nobody knows what the real amount is or how this will impact markets. They have confirmed 2B plus the 3B above maybe. We will see how this mess unfolds over the next weeks.

JPM has big losses and no way to unwind their positions.

Shibumi2's picture

Based on past performance, I doubt there will EVER be official disclosure.


With the trillion plus sub-prime fiasco not really affecting the banks, this would seem to be nothing more than a blip.


I'm really fed up with this double-standard bullshit...society maintaining separate laws and enforcement standards based on industry sector and financial standing...and on top of it all, a bogus, fictional fiat

Kiwi Pete's picture

Well every trader and his dog will pile in to the other side of the trade and totally fuck them up. When you're a forced seller and everyone else knows it that is not good. Remember Barings?