This page has been archived and commenting is disabled.

JPM's Bogeyman IG9 Notionals Soar On Most Active Week Of Year

Tyler Durden's picture




 

DTCC just released the latest and greatest details on the CDS market's net and gross notional exposure and it makes for fascinating reading. Simplifying considerably, gross notionals somewhat represent activity and net notionals proxy exposure. We see gross IG9 index notionals (the index most at the centre of the JPM debacle) jumped but IG9 tranche gross notionals were steady; but net tranched credit notionals jumped and net untranched fell. This suggests an unwind of a delta-hedged tranche position with considerably more index impact than tranche impact - which smells just like what we think JPM was struggling with (and it appears is far from over). However, there was a huge jump in the number of trades done in the on-the-run index IG18 - last week was the most active of the year by far which fits with the surge in gross notional that we saw - as it would appear (as we noted previously) that the focus is now on using liquid indices to hedge whatever risk remains on JPM's book - which further helps to explain why IG18 has underperformed so much recently relative to HY credit and stocks.

IG9 net notionals for tranches rose while net index notionals fell in the last two weeks (suggesting the unwind of a hedged tranched credit position in size) - though note the minimal shift in index net notionals compared to the last few weeks (more to come - and remember this is aggregated across all maturities, not just 10Y)...

but gross notionals are higher for both tranched and dramatically so for untranched IG9 as activity picked up...

which is reflected in the fact that IG18 had its busiest week of the year - it is clear that the instrument of choice for hedging the hedge or reducing the risk is the on-the-run index...

as gross notionals jumped dramatically for IG18...

and while IG9 is contonuing to underperform - especially post Dimon's admission call...

it is clear that IG18 is suffering the most now as liquidity is coming at a premium for the bank to hedge its exposure...

Data: CMA

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 06/13/2012 - 14:30 | 2522666 Hal n back
Hal n back's picture

who really understand all this?

Wed, 06/13/2012 - 14:33 | 2522682 Dr. Engali
Dr. Engali's picture

Certainly not Jamie Dimon.

Wed, 06/13/2012 - 14:40 | 2522725 runlevel
runlevel's picture

I dont login often, but when i do, its for funny shit like that. 

 

Wed, 06/13/2012 - 14:51 | 2522800 nope-1004
nope-1004's picture

It means JPig is scrambling for liquidity to hedge the pressure put on them by other banks, who smell blood.  JPig won't publicly admit they are feeling the heat, but these graphs show it.

 

Wed, 06/13/2012 - 14:54 | 2522812 Dr. Engali
Dr. Engali's picture

I think we all get that...It's trying to understand the trade itself.

Wed, 06/13/2012 - 15:14 | 2522875 AlaricBalth
AlaricBalth's picture

This might help. (From Forexer out of Singapore)

 

I feel it is imperative for all market participants to have a general understanding of how JPM's hedge blew up, something that some espouse as a black swan (think LTCM in 1998 & probably the exposing of MFGlobal's corzining of investor capital to cover losses on sour speculative bets). The MSM has been quick to cover this story on JPM's alleged felony with regards to its risk management and how a "hedge turned speculative". Whilst there are bits of true facts and opinions presented, a good chunk of it is quite literally bosom-dung. Zerohedge has put up a meticulously detailed analytical piece on how things went wrong and puts the CIO (chief investment office) decision making tree in soft focus - A must read for folks who want the fresh juice of the entire edifice on a grand scale. I'm merely going to share my analysis which contains alot of the stuff in Zerohedge's piece but also delve deeper into where more explanation is warranted. This isn't child's content, it is deep stuff (think quantitative finance) so take some time to really understand every sentence in this post and in Zerohedge's piece. 

What was JPM Hedging?
Although no non-insider knows for certain, point and shoot guesses would likely be commercial loans on the books of JPM's commercial banking arm. I think this is an aggregated book meaning the portfolio of loans originated from US corporations and probably a few hundred million Dollars in consumer loans. Reasons for this is because due the CIO's hedging instrument of choice (read on for more details later). The size of this portfolio is unknown but should be huge, very huge (large enough that risk models weren't able to detect micro seismic faults before the markets turned against their hedge. I read that Jamie Dimon (JPM's CEO) has expressed willingness to testify infront of congress (remember Goldman's "$hity deal" buzzword during hearings on allegations of conflict of interest; "Timberwolf securities" ect...). Let's hope more light will be shed on this very elusive subject on what was actually being hedged and in what quantities.

The Hedging Instrument of Choice
As Zerohedge pointed out, the CIO probably wanted a cheap hedge against extreme tail risk (think global systemic risk; ie: Europe falling apart; non-idiosyncratic credit risk (non-company specific credit risk); many corporates defaulting at once) that would payoff (covering/lowering cash losses on the underlying loan book) amidst utter chaos and financial cataclysm. It is much cheaper to hedge such risks in aggregated form rather than buying protection on individual names.

Zerohedge rightfully opines the CIO's sole intentions were to protect against adverse market movements which risks' cannot be immunized through conventional covered loan risk management strategies.

To wit:

Quote: Originally Posted by Zerohedge 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.

The CIO decided to long the super senior tranche (a cocktail mix of 5Y, 7Y, 10Y maturities) of the CDX.NA.IG index. CDX.NA.IG is a composite CDS index of 125 individual US corporates (reference this back to the underlying portfolio being hedged).

Zerohedge explains that the CIO chose the super senior tranche due to its relative cheapness over subordinated tranches (junior, mezzanine, equity) due to the higher leverage it offered (less funding requirements, somewhat resembling a SS tranche of a synthetic CDO where upfront payments aren't necessary because potential losses will be buffeted by the lower tranches), but more importantly SS offers "(sensitivities) to spread movements (low), volatility (medium - due to hedging gaps), andcorrelation (high)." Correlation risk was what the CIO was implicitly hedging against. A rise in correlation indicates increasing latent systemic risks; hence the hedge needs to be highly sensitive to correlations.

The SS tranche also protects against conterparty risk (risk that the writer of the CDSs fail to payup in a credit event). Conterparties can include SPVs that structure synthetic CDOs. Losses due to such risk will be passed to the lower tranches before it hits the SS tranche (if the losses are huge enough). Hence the CIO's decision to be long the SS tranche was based on their prescient knowledge that only deep shocks would require such hedging and the SS tranche was perfect for this purpose. 

Quote: Originally Posted by Zerohedge
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.

The hedge would appreciate in price as spreads widen along with SS tranche correlations (IG index falls). There would be some form of payouts if any component defaults and will filter through the SS tranche before running down to the junior tranches. I would believe the CIO paid a slight upfront payment (a small percentage of the initial notional) and periodic interest payments (since CDX.NA.IG is trading on a conventional spread rather than upfront; again offering more leverage and making the hedge cheap). 

Informed guesstimates of the initial notional (in the SS tranche) ranges from $200bn-$300bn. Again, no one knows the exact figure but from the monthly Depository Trust & Clearing Corporation (DTCC) report on outstanding notionals one can make a ballpark guess.

So What Went Wrong?
The CIO's hedge fared relatively well in Q1-Q3 '11 courtesy of European contagion and the Greek spillover, and the downgrade of US by S&P. Remember the panic ensuring the proverbial US downgrade (recruit pitting at Hitler's face)? Yes, as Zerohedge intelligently points out, that was just about the peak of tranche correlations as the markets settled down in a consolidation before beginning their arguably benign march higher - the bears would reminisce how odious it was. 

To Wit:

Quote: Originally Posted by Zerohedge 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.


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.

The gist matters have already been succinctly presented by Zerohedge. The FED's Operation Twist (Maturity Extension Program) and cross currency swap lines with the ECB, and the ECB's 3Y LTRO having commenced in Dec11 proved detrimental to credit tranche correlations. IG credit (proxied as CDX IG9) rallied along with equities post the binary collusion of the two central banks. Zerohedge likened correlations to deltas (ie: RoC of an option's price relative to the underlying's). Although there are broad similarities, I would meekly note that deltas have either positive/negative empirical relationships to price whilst credit tranche correlations do not have - their relationship can be described as slightly idiosyncratic (meaning correlations may rise even if IG spreads compress, not necessarily when spreads widen). Regardless, the CIO wasn't concerned about IG spreads rising or falling but about correlations tanking to never seen before levels. 

This is the bane of hedging via tranched credit products as the CIO undertook - correlations have to be dynamically managed. What was just described above marked the inflection point for matters over at the CIO's desks. As a result of a very rapid decline in correlations, the CIO needed to neutralize a good part of its 'short' credit exposure by shorting IG9 or by writing CDS protection on IG9 (same ends, different means). Zerohedge believes that the CIO did almost all of the re-balancing by shorting IG9 outright. The extreme RoC of correlations meant that the CIO couldn't sell IG9 protection in a gradual fashion that would preserve market normalcy; but rather frantically offer heavily into the index day after day after day... So much so that this operation created a gaping skew between the IG9 index and its intrinsic fair value (summation of individual names). 

To wit:

Quote: Originally Posted by Zerohedge 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 which forced the index to trade differently to its intrinsic or fair-value. These kinds of disconnect are often arb'd by sophisticated hedge funds - but this time the arbs were being frustrated 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).

Note: Iksil (the "London (wriggly sperm) whale") was inherently "long" IG9 index because he was selling IG protection (ie: short the spread, long the index). The Zerohedge description pertaining to the arbitrage opportunities simply means that the arbitrageurs would buy IG9 protection and sell individual protection (hence "short" IG9 index and "long" corporate credit) hoping that the basis would narrow when IG9 spread eventually widens.

What happens next is from the devil within all flesh: Greed. What was a "hedge of a hedge" (IG9 protection selling) turned into a market chasing, momentum trade which Iksil was overly effervescent about. He was chasing his own tail; the more he sold protection, the harder the index was bid, the larger the 'profits' on his hedge trade, the more he sold... ad infinitum in a vicious circular reference spell. 

And then things start to change fundamentally; the mirage vanished while Iksil and the entire CIO realized the hideously obscene blunder they have committed being one of the top prop trading desks on Earth. I'm going to quote Zerohedge for the following sequence of events that makes me cringe.

Quote: Originally Posted by Zerohedge
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...

The vulture phenomenon kicks in: The Hedge funds that knew the plight JPM was in started to short the basis and with much passion indeed (not only did they buy tons of IG9 protection along side the CIO but also shorted all other related credit indices, adding more pressure to the CIO's overloaded long exposure whilst also squeezing every last but of liquidity from the IG9 market like a blood thirsty daemon in a wild, unfathomable hallucination. In the days preceding Dimon's call to inform the world about JPM's $2bn material loss, IG9 spreads started soaring ad Iksil started to unwind his then-turned speculative trade. The spike in spreads accelerated post Dimon's call. Add the broad risk-off environment that has been buffeting global equity and credit markets for the last 2-3 weeks and one would see why actual losses would uncountably surmount $2bn. Zerohedge estimates losses will be north of $3bn. 

And to end things off with the FED's curse:

Quote: Originally Posted by Zerohedge 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). 

My synopsis of this tragedy? Over reliance on mathematical modelling (on hedging and risk management premises), human psychological weaknesses (greed), and sheer unfortunate luck. What could have been better done? Contrary from that MSM squawk about, JPM did the right thing initially. The hedge was operationally sound (loan books need to be hedge in out current environment of heightened credit and default risk) and the dynamic management of the hedge was routine and somewhat rudimentary. However, the trimming of the initial hedge exposure should have been conducted on a broader scale. Rather than performing this operation on a single OTC and relatively illiquid credit index, it could have been diversified through shorting protection on individual names, going long synthetic CDOs on similar IG credit and then having a much smaller position outright long IG9. It is not the sole error of over positioning a trade and the posterior consequences but the decision making dynamics behind the CIO's path actions. Risks of human error were not spread out, per se and that is one of the key take away points of this saga.

 

Wed, 06/13/2012 - 15:25 | 2522968 W10321303
W10321303's picture

Hedging a hedge is called Hedginess

Wed, 06/13/2012 - 15:31 | 2523016 earleflorida
earleflorida's picture

Well said, Thankyou :-))

Wed, 06/13/2012 - 15:34 | 2523040 sdmjake
sdmjake's picture

I appreciate the synopsis (and use of ZH notices throughout) but don't wholly agree. In conclusion this 'forexer' says it was a good, albeit rudimentary, hedge and that it just lacked some diversification. YET, that diversification would have violated the CIO primary goal, to wit: finding very cheap leverage to hedge the tail risk. 

The reality is these c*cksuckers got too smart for their own britches (bitchez) and Murphy's law required a good ol fashioned smackdown.

Wed, 06/13/2012 - 19:03 | 2523791 q99x2
q99x2's picture

ZeroHedge is a hedge against corruption.

Wed, 06/13/2012 - 19:33 | 2523857 OtherPeoplesMoney
OtherPeoplesMoney's picture

Mmmm.... If you own super senior protection and correlation drops you get LONGER credit. Why would you then go out and sell more protection to get longer still? Certainly not to "hedge the hedge". Basically this argument is bullshit.

Also beware of drawing too many conclusions from DTCC data, From the DTCC's own "Explanation of Trade Information Data " document.

"These publicly available reports may not contain all live positions in the Warehouse as of a specified
date if disclosing such positions could reveal, directly or indirectly, proprietary or confidential,
financial, operational or trading data of a particular Warehouse participant ("User"), or inappropriately
arranged groups of Users in such a way that may indicate the identity of the User or User group."

document available on - http://www.dtcc.com/downloads/products/derivserv/tiw_data_explanation.pdf 

 

 

Thu, 06/14/2012 - 00:14 | 2524556 Nobody For President
Nobody For President's picture

Thanks for this - I have spent way too many midnight hours trying to get my head around this blow up, and I sorta-kinda-almost get it with your post.

I DO understand that I really don't get Delta yet...

 

Wed, 06/13/2012 - 14:40 | 2522726 sunaJ
Wed, 06/13/2012 - 15:20 | 2522944 BlackholeDivestment
Wed, 06/13/2012 - 15:40 | 2523011 Cupid Stunt
Cupid Stunt's picture

?

Wed, 06/13/2012 - 15:38 | 2523024 Cupid Stunt
Cupid Stunt's picture

There's me thinking that IG9 was an Apple product.

Wed, 06/13/2012 - 14:38 | 2522711 hwwesq3
hwwesq3's picture

Any Asian 5-year-old

Wed, 06/13/2012 - 14:41 | 2522734 runlevel
runlevel's picture

When i read this stuff, i read it the same way i listen to other languages i dont know. at some point im reading so fast its a blur and you think you understand what they are talking about until you step back and realize you dont even know wtf IG stands for.. 

Wed, 06/13/2012 - 14:54 | 2522815 fuu
fuu's picture

Intentional Gambling?

Wed, 06/13/2012 - 15:27 | 2522981 W10321303
W10321303's picture

Casino Royale...All Hail EMPEROR JAMIE!

Wed, 06/13/2012 - 15:00 | 2522840 Itch
Itch's picture

Investment grandeur.

Wed, 06/13/2012 - 14:43 | 2522742 Mark123
Mark123's picture

You can rest assured that our brave, noble regulators are completely on top of all this and looking after our welfare.

 

Really though, I can now understand why they spend their days watching porn.

Wed, 06/13/2012 - 15:06 | 2522794 resurger
resurger's picture

 

 

Our very own ZH

http://www.zerohedge.com/news/irony-101-or-how-fed-blew-jpmorgans-hedge-...

http://www.zerohedge.com/news/behind-iksil-trade-ig9-tranches-explained

 

or this

 

The official name of this index is CDX.NA.IG.9. It includes 125 equally weighted reference entities that are liquid in the Investment Grade CDS market.

Coupon: Varies depending on the trade

The IG CDX index trades based on spread. For example, ig9 recently closed around 120 bps. This means that if you go long the index, you receive the annual coupon, paid quarterly, as well as an upfront to adjust the equivalent spread to the traded level.

Credit Events: When a Credit Event, such as bankruptcy or failure to pay, occurs on one of the names, if you are long the index you are responsible for the loss. The loss depends on the recovery rate of the name, which is determined in a market auction (click here for auction primer). For example, if the recovery rate was 40%, the loss would be 60%, so you would owe 60% * 1% weight of the name * your notional of trade.

 

 

 

Wed, 06/13/2012 - 15:38 | 2523067 Amish Hacker
Amish Hacker's picture

Every now and then I catch myself thinking, "Gee, if only I understood all this CDX.NA.IG.9 stuff, I'd be rich." Then I remember that the people who do understand it (or claim to) just blew themselves up.

Oh, well. This kind of trading isn't a life, it's a life sentence, and I'd rather be free than rich anyway.

Wed, 06/13/2012 - 15:05 | 2522842 ebworthen
ebworthen's picture

Hal n back asked:  "who really understand all this?"

Vegas Version:

JPM using deposits, bailout cash, and FED backdoor loans at 0.05% to gamble.

Their magnets on the bottom of the roulette table stopped working right when they had a 30-to-1 bet on 00 Black.

Other gamblers eyeing all of JPM's chips still on the table and licking their lips as they bet the red and the wheel spins.

Wed, 06/13/2012 - 15:06 | 2522871 Todd Horlbeck
Todd Horlbeck's picture

That is the problem.  The managements that created this have long since been replace.  The new managments create new securities, and then they are replace.  The ones that stick around and warn of problems, get fired. Can someone at JP Morgan really say they have a grasp of a ten year old derivitave that they didn't create?  The insentive is too large to remain quiet even if they did understand it.

Wed, 06/13/2012 - 16:09 | 2523228 SqueekyFromm
SqueekyFromm's picture

I don't understand it, and I am not just totally stupid or anything. I read all the stuff here about the IG9 thingies and they don't make any sense to me about what exactly is being hedged, or how this helped protect JPM or anybody else. What, do you place some bets on the Roulette Wheel, which is mostly random luck, to hedge your bets on Texas Hold 'Em, which is mostly skill???

The really bigger question is, what has all this activity done to create anything tangible???

Squeeky Fromm, Girl Reporter

 

Wed, 06/13/2012 - 18:01 | 2523627 Boxed Merlot
Boxed Merlot's picture

...place some bets on the Roulette Wheel, which is mostly random luck, to hedge your bets on Texas Hold 'Em...

 

As long as the cocktail waitress keeps coming by it's all good.

 

Wed, 06/13/2012 - 14:31 | 2522670 superbroker1
superbroker1's picture

SPEAK AMERICAN!

 

Wed, 06/13/2012 - 14:33 | 2522681 Gully Foyle
Gully Foyle's picture

superbroker1

Money shit

Wed, 06/13/2012 - 14:33 | 2522687 ruffian
ruffian's picture

So does this mean JP's losses are getting close to that whispered $100 billion mark or that they've stopped the hemorraging?

Wed, 06/13/2012 - 16:37 | 2523344 sdmjake
sdmjake's picture

No way...as i understand it, their total exposure wasn't much more than 100b with this IG9 piece. They were essentially trying to hedge their other corporate bond exposure [its the Morgue so you know thats gotta be 250+Bil] against complete market calamity. So they bought an index of CDS that holds the good stuff (AT&T, HomeDepot,etc) as well as the bad stuff (Fannie, Freddie, countrywide,etc). Very cheap levered way to cover the risk. They are so big they effected the pricing. it blew up. they had to unwind BUT their losses will not be "total". It didn't go to zero. It's just such a giant, levered bet that it only needs to move a little and you lose billions.

Wed, 06/13/2012 - 14:36 | 2522696 poldark
poldark's picture

All above my head!!

Wed, 06/13/2012 - 14:38 | 2522707 Dead Canary
Dead Canary's picture

Uhh... so, does that mean I should keep my silver?

Wed, 06/13/2012 - 14:46 | 2522750 Canadian Dirtlump
Canadian Dirtlump's picture

iI keep a bag by the door in case a solicitor comes by. BOFF! Homie don't play that game.

Wed, 06/13/2012 - 14:38 | 2522714 Dr. Engali
Dr. Engali's picture

I think it's pretty safe to say I won't be putting on that trade.It's way above my pay grade. Anybody want to talk options?

Wed, 06/13/2012 - 14:39 | 2522720 Mark123
Mark123's picture

The fact that this sort of "investment vehicle" even exists proves we are totally screwed.

 

Ponzi on boys.

Wed, 06/13/2012 - 16:37 | 2523351 sdmjake
sdmjake's picture

AMEN!!!!

Wed, 06/13/2012 - 14:43 | 2522737 Canadian Dirtlump
Canadian Dirtlump's picture

Now that someone more qualified than me has done the intellectual heavy lifting, I'll add my 2 cents.

 

blythe's pussy smells like an open grave and jamie is the name of a prepubescent boy, not a CEO ( James ) .

Wed, 06/13/2012 - 15:07 | 2522879 Dr. Engali
Dr. Engali's picture

Have you been sniffing around that thing?

Wed, 06/13/2012 - 14:43 | 2522745 fonzannoon
fonzannoon's picture

I like when Tyler sums it up in big bold letters and says things like "This is bad". It helps.

Wed, 06/13/2012 - 14:50 | 2522791 Canadian Dirtlump
Canadian Dirtlump's picture

LIke when you are lost in a conversation with people and wait to react by copying their reactions..

Wed, 06/13/2012 - 14:49 | 2522771 PaperBear
PaperBear's picture

JPM are toast, it’s just that the guillotine mechanism has been triggered yet. Apologies for mixing my metaphors.

 

Wed, 06/13/2012 - 15:03 | 2522855 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

"It's all spilled milk under the bridge."

Wed, 06/13/2012 - 15:32 | 2523029 PaperBear
PaperBear's picture

Oops ... guillotine mechanism has NOT been triggered yet.

Wed, 06/13/2012 - 14:48 | 2522773 poldark
poldark's picture

Tyler, maybe when you have a few days to spare you can explain what all this means!

Wed, 06/13/2012 - 14:52 | 2522806 Dr. Engali
Dr. Engali's picture

I started researching the trade on the net after a little study I thought to myself..."what the hell do I need to know this for? I will never use it".

Wed, 06/13/2012 - 14:55 | 2522819 CommunityStandard
CommunityStandard's picture

I've previously researched the IG-9, but there's hardly anything on the IG-18.

Wed, 06/13/2012 - 14:50 | 2522793 Downtoolong
Downtoolong's picture

Suddenly the slogan “We Are The Market” is no longer the banner of pride and achievement it once was.

It makes me think of that old AIG slogan, “We Know Money”, which easily converts with a few strokes of the delete button to “We No Money”.

Wed, 06/13/2012 - 14:52 | 2522804 firstdivision
firstdivision's picture

Who is levitating the EUR for the past hour?  Hardly any movement.

Wed, 06/13/2012 - 15:03 | 2522814 LetThemEatRand
LetThemEatRand's picture

Yet when everything comes crashing down, the mindless sheep population will accept by and large that the problem was welfare queens (they won't think of Jamie as one even though he is), unions, and so-called "entitlement programs."  The fact that most people already accept that an insurance/shared pension system we all contribute to is effectively welfare that must be eradicated to save the country, is itself proof of this inevitability.

Wed, 06/13/2012 - 14:56 | 2522825 Confundido
Confundido's picture

I do understand what this guy wrote...I think. The main take away here is that the distortion in relative prices in CDX/single names shows how fucked up this market is. You gotta be insane to trade it on fundamentals. So, banks lend on fundamentals and fucking Phds running correl trades try to hedge loan risk in rigged markets? Good luck with that. The best hedge here is not to own an asset, and retail money has learnt it the hard way (which is the only way to learn, by the way).  

It's interesting to see now, after reading this, that Eric Beinstein, from JPM, had recommended the IG/HY S18 trade on Feb 28/12....

Dimon should have had the balls to tell everyone there that the IG9 position went bust thanks to the intervention of central banks in Dec/11...but he didn't....

Wed, 06/13/2012 - 15:03 | 2522859 DutchR
DutchR's picture

.223 trumps IG9, right

just asking.... 

Wed, 06/13/2012 - 15:04 | 2522864 shovelhead
shovelhead's picture

"Bruno, what the fuck does all this shit mean?"

"Never mind Jaime, it means we're going to make a killing."

"OK, that's good then."

Wed, 06/13/2012 - 15:09 | 2522890 slewie the pi-rat
slewie the pi-rat's picture

where is bob_d to tell us he is long tranched and short untranched credit?  net, of course...

if i could understand this, i would try to say something more intelligent...

earlier, taking my cue from other ww.writers i questioned whether the jpMorgue and gone a bit LTCM risk-wise by adding to hedged positions rather than taking profits and losses along the way

LTCM were options guys (nobelLaureate type) and options guys know the drill

and the jpMorgue guys know it, too;  if ol' option-trading-from-home slewie knows this shit, they know it, too, ok? 

so altho i can't understand this, is he saying theMorgue is now rolling rather than adding tranche-indexed exposure plays?

but does it matter?  if theMorgue is TBTF, what possible difference could 2-4$Bil of derivatives losses mean, even as a hit to equity?

the (losses? paid out to whom?) questions remain

this is a zero-sum game, is it not?  who got the fuking money?  or isn't anyone except for slewie rude enuf to ask? 

Wed, 06/13/2012 - 15:13 | 2522914 Jena
Jena's picture

Thanks for the Mogambo Guru guy.  Hilarious.

Wed, 06/13/2012 - 15:29 | 2523005 suckerfishzilla
suckerfishzilla's picture

Maybe the money paid out went to an undisclosed nation with no extradition treaties.  Qatar maybe.  Who knows?  Just a guess. 

Wed, 06/13/2012 - 17:39 | 2523556 slewie the pi-rat
slewie the pi-rat's picture

china seemed to be in need of a little succession-of-power lube, too, didn't it?

this packaging is abt the right siZe...

that fungicide is quite the horse, you know...?

Wed, 06/13/2012 - 15:23 | 2522953 W10321303
W10321303's picture

ALL HAIL EMPEROR JAMIE! 

.....That’s of course, assuming that they can pull off making bets on tail risk. Nassim Nicholas Taleb took issue with that idea in a recent BBC interview and said that JP Morgan is taking 10 to 15 times the risk of a regular hedge fund: (www.nakedcapitalism.com)

And confirming Taleb, Dimon said the new VaR model that was implemented backtested well but didn’t work so well in practice because the past does not predict the future. Duh! But we’ve suggested, there were likely other motives for using the new VaR. It was clearly intended to allow the CIO (and probably other units) to take bigger risks and yet show no increase in VaR to supervisors.

Not surprisingly, Dimon was good at giving irrelevant responses. When Jeff Merkeley tried to pin the JP Morgan CEO on the hedge fund-like nature of the CIO, Dimon talked about the low-yielding/low risk nature of the underlying assets. That may be true, but what about the derivative positions taken on top of that? Dimon only described one part of the CIO’s operations. Similarly, Jon Tester went after MF Global, trying to argue that Dimon withheld customer monies and Dimon batted that back, saying he had waited for instructions from the trustee while omitting the fact that he was fighting tooth and nail in court.

Dimon had to concede that Volcker Rule might have stopped this botched CIO trade. Remarkably, he argued regulators could not have caught this. Huh? This was an outsized position in an illiquid market. It would not have been all that hard to notice something amiss if anyone had been watching. The size of a position relative to average trading volumes should be monitored for any meaningful positions.

Ironically, Dimon’s throwaway comment to Merkley, that he’s already confessed to and takes full responsibility for the ‘small’ synthetic derivative portfolio’s mistakes, was never picked up by the other senators, and I’ll be surprised if the media appreciates the significance of that wee confession. Since Dimon has admitted in Congressional testimony that he was responsible for the internal control failures in the CIO portfolio SOX should now be a slam dunk for the SEC. But of course, that will never happen.

It was instructive to see how effective confident misrepresentation can be. Most of the Republican senators fawned over Dimon after the ritual scolding at the top of the hearings, and I suspect most of the media will simply replay his lines uncritically. There were a few that will work against him, like his reluctant admission that the Volcker rule might have prevented the failed London trade. But in general, reducing complex situations to soundbites allows for obfuscation and misdirection, which is exactly what Dimon and his ilk are keen to have happen.

America, Land of the sheep, Home of the easily distracted....

BAAAAAHHHHHHHHHHHH

Wed, 06/13/2012 - 15:36 | 2523047 W10321303
W10321303's picture

....While that revelation is a dent to the reputation of self-styled ubermensch and alleged control freak Jamie Dimon, if he takes a few lumps in the press and otherwise can carry on as before, what difference will it make to him and the industry? Lloyd Blankfein took at least as much heat over a longer period, and he’s still firmly in place.

Reading between the lines, it appears that the London traders were pretty confident as to what the real game was, and it wasn’t following a strategy, but making money. That would be fine if this were a prop trading unit, but remember Dimon’s consistent claim: that this unit was hedging. As Michael Crimmins has discussed, that argument is bunk, since the failed position did not get hedge accounting treatment, meaning it was not closely enough related to any underlying position to be characterized as a hedge.

So what does that mean, in practical terms? It means the CIO is the perfect prop trading/income smoothing vehicle. You can realize gains whenever you want to, by selling (provided the position is in a reasonably liquid market) or possibly even moving it over into your trading portfolio and you can defer most losses. If it makes a turkey trade, it can bury it until the bank has other trading gains or income in other businesses to offset it. And it can keep profitable positions around and realize them as needed to smooth earnings (while the unrealized losses are reported in footnotes, most investors don’t seem to pay much attention to that item). Investors really like smooth earnings, they mistake them for stability and strength of the business, as opposed to adept profit management. No wonder the people in the CIO were so well paid. They’d have to be Dimon’s favorite people.

And thus it makes perfect sense that the unit would not be that closely supervised by senior management. Dimon would need plausible deniability that he was abusing the investment portfolio (which he apparently did; there were questions raised about his use of the investment portfolio when he was CEO of Bank One). Even though it has been reported at $370 billion, which already seems a tad outsized, this is presumably the magnitude of the cash and securities positions. Who knows how much in derivatives trades are booked in addition to that.

 

 

So is the real secret of Dimon’s “fortress balance sheet” that he keeps overly large liquidity buffers so he can run a bigger, better prop trading business? It could well be, but I doubt any of the investigations underway will probe deeply enough to find out for sure.

When do you think the Emperor will be finished with his violin lessons.

Wed, 06/13/2012 - 15:43 | 2523096 W10321303
W10321303's picture

 

“Hypothetical, illustrative example of the orderly liquidation of JPMorgan Chase”

http://ftalphaville.ft.com/blog/2012/06/13/1040881/hypothetical-illustrative-example-of-the-orderly-liquidation-of-jpmorgan-chase/

In March, Gregory Baer, deputy general counsel, presented a plan to policymakers and bankers to show the results of a hypothetical $50bn loss. It showed the bank would fail, shareholders would be wiped out and Jamie Dimon, chief executive, would be fired. …

In the doomsday scenario set out by Mr Baer, a $50bn loss would trigger “a run on the bank” – with $375bn of funding, including bank deposits, draining away.

The government would then step in and mark down the bank’s assets, leading to an additional $150bn loss. Shareholders would be wiped out but senior creditors would be transferred to a new bridge company that allows “critical activities [to] continue to operate smoothly”. Their debt would be restructured into equity.

The bank might require $200bn of temporary government funding, though the bridge company would return to the private sector and New JPMorgan would raise $200bn in the private markets to repay the government loan, the plan says.

Wed, 06/13/2012 - 16:06 | 2523137 GeneMarchbanks
GeneMarchbanks's picture

Hopefully this concludes your three part series on the absolute madness of this saga. Is this a warning to depositors from the inside?

Inquiring minds...

Wed, 06/13/2012 - 17:02 | 2523440 Atlantis Consigliore
Atlantis Consigliore's picture

BAAH MEDIA   BAAAH  MF GLOBAL,  BAAAAH BAAAAAH, THEY ARE SHEEP. 

 

OH on the position  BS...any one of you here a trader?  forget? the gs losses in Long Term Capital, how it took down ubs BK, had to merge with swiss bank????...

 

RULE; YOU NEVER TRADE LARGER THAN THE MARKET,  your position is your limit to the liquidity size of the market  to get out, neutral  with a loss 5-10%

 

thiese jerks just layered more postions on positions,  $ 100 B worth in an 800 B mkt?  how do you get out....

 

any monkee, and they most are monkees can use a model to bet Martingale, and double up on each loss, or just add more to your loser until your....BROKE    IDIOTS.

 

ans:  YOU CANT.   SO HES STUCK, AND IF EU EXPLODES SO DOES HIS BOOK.

 

smart .......if theres a $ 50 B loss they deserve it,   all derivates should be on exchanges, with offshet/  and postion limits.....to match risk....

 

NO STUPID....BUT THEIR BANKS AND BANKSTERS,

 

THEY DONT TRADE,  THEY ONLY KNOW HOW TO STEAL MORTGAGES AND PUT ON LIMIT POSITIONS. 

Wed, 06/13/2012 - 18:00 | 2523609 Overdrawn
Overdrawn's picture

Heckler calls Jamie Dimon a crook to his face.

 

Dimon says losses were an 'isolated mistake'    got to give it to him, he has a sense of humour.

 

 

http://edition.cnn.com/video/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fcnn_topstories+%28RSS%3A+Top+Stories%29&utm_content=Google+International#/video/politics/2012/06/13/dimon-jp-morgan-chase-heckler.cnn

Wed, 06/13/2012 - 18:53 | 2523753 GNWT
GNWT's picture

Like many threads, my ZH Mood Indicator - all rights reserved! (ranking the state of satisfaction of the ZH - read bearish trader" - is flashing a very bearish signal, umm, maybe.

I know there are many serious REAL traders here, you know the ones that can't get more monopoly money when they take losses.

So, I have noticed that, much like watching the tape, I can guage when the bears, and come on, there are more bears and PM holders here than flies on shit are nervous or settled - like now.

Short and nervous and everyone wants to kill Dimon and Bernanke.

But the mood has changed across ZH, ridicule but not enmity.  Much worse.

So, when everyone is cracking jokes and talking about cousin Jamie like a prized pig to be slaughtered, is this the sweet spot of the trade where Jesse Livermore surfs his way to Long Island?  

The acceptance phase where the bulls say, "This is a healthy correction, nothing to see here, move along."?

What I need help on and feel free to comment, since I have only guaged for a week now is:

Is the ZH Mood Indicator - all rights reserved! a contrary indicator and should I fade y'all?  

By the way, next person who says risk on risk off is a dead one.

G

Stay liquid my friends...

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