The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps

Tyler Durden's picture

As anyone who has ever traded CDS (or any other OTC, non-exchange traded product) knows, when you have a short risk position, unless compliance tells you to and they rarely do as they have no idea what CDS is most of the time, you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid. That way the P&L always looks better. And for portfolios in which the DV01 is in the hundreds of thousands of dollars (or much, much more if your name was Bruno Iksil), marking at either side of an illiquid market can result in tens if not hundreds of millions of unrealistic profits booked in advance, simply to make one's book look better, mostly for year end bonus purposes. Apparently JPM's soon to be fired Bruno Iksil was no stranger to this: as Bloomberg reports, JPM's CIO unit "was valuing some of its trades at  prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter. "I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers,” said the former chief financial officer of Lehman Brothers Holdings Inc."

At this point, Zero Hedge assumes that Iksil was merely abusing the little loophole used by every CDS trader since time immemorial, which however on a TRSed position of $100 billion in notional, which based on our calculations has a DV01 of $200 million, means that the bid/ask spread itself is worth $500 million in profit (and not so much loss).

However, if what Bloomberg is implying is that Iksil was effectively overriding "real" marks, and using imaginary (or "forced") bids and asks, then that brings into question the validity of CDS marks reported by MarkIt, the same MarkIt partially owned by Goldman and... that's right, JP Morgan (more on MarkIt in a moment).

But first, back to Bloomberg:

Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment on whether the CIO and investment bank were using different prices.


“All components of the synthetic credit portfolio in the chief investment office were mark-to-market,” she said.


The trades in question, made by a CIO group that included Bruno Iksil, nicknamed the London Whale because his positions grew so large, were on so-called tranches of credit-swap indexes, the people said.


Tranches allow investors to wager on varying degrees of risk among a pool of companies. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.


Because JPMorgan had amassed such large positions, even a small change in how the prices were marked may have generated a big difference in the value of the trades, one of the people said.

While very little is known at this point, the realization that JPM did in fact abuse mark-to-market of a Level 1 security means that if Iksil's book was marked fairly, to mid-market alone, let alone to the real exit level opposite where it is most profitable (i.e., long risk as in the case of Bruno Iksil's IG9 holdings -> mark at offer, and vice versa), the losses would be materially greater, potentially up to hundreds of millions in the remarking process itself? And any further uncertainty about JPM's accrued losses, which we now know had to be covered up by tens of billions in asset sales from its portfolio (but, but JPM certainly did not need the cash) will merely add to the toxic spiral that is the pounding of JPM stock, coupled with further widening in IG9-10, which leads to even more JPM stock losses, which further blows out IG9-10 and so on.

One thing we do know is that in a recent case of a UBS prop trader, caught mismarking his CDS book, there was some serious litigation involved, and major accusation of illegalilty. Once again, from Bloomberg:

Ramon Braga, a trader on the bank’s corporate-credit desk in London, was fired for collusion in the alteration of “marked-to-market” values of credit default swaps by Denis Minayev, UBS staff said at an employment tribunal yesterday. Minayev, a proprietary trader, “re-marked” Braga’s trading book on 66 occasions, even though he shouldn’t have had the authority to do so, UBS investigator Richard Kennedy said.


If you shift one of those markers, it can give a completely false picture,” employment Judge Graeme Hodgson said at the hearing.


Braga, who is suing for unfair dismissal, was an inexperienced trader who was “thrown in at the deep end,” his lawyer, Amy Sander, said at the hearing. He wasn’t aware of many of the changes Minayev made, she said, and thought his actions were permitted by managers. Braga was also accused by UBS of “procuring a false broker quote,” she said.


UBS is already dealing with the fallout from what the bank said were unauthorized trades by London-based UBS employee Kweku Adoboli, which led to a $2.3 billion loss, regulatory probes and the resignation of Chief Executive Officer Oswald Gruebel. JPMorgan Chase & Co. (JPM) CEO Jamie Dimon said yesterday his New York-based firm suffered a $2 billion loss after a trading unit’s “egregious” failure to manage risks.


Dominik Von Arx, a spokesman for Zurich-based UBS, said Braga “was a junior employee” in the bank’s fixed-income, currency and commodities unit.

“He was dismissed for gross misconduct in October 2011 following an investigation into alleged mismarking,” Von Arx said in an e-mailed statement. “UBS has zero tolerance for such behavior.”

During cross-examination of Braga today, UBS lawyer Bruce Carr said Braga had asked a broker friend to send him a quote that justified changes made to his valuation, after a colleague said the price was too high.


“You get an entirely unsolicited e-mail that happens to fit” the valuation, Carr said. “That’s quite a coincidence, isn’t it?”


Braga responded that his “dismissal shouldn’t be based on speculation or coincidences.”


The product being re-marked was a credit default swap on European industrial-company bonds, which was illiquid and difficult to value because it was rarely traded.


Lawyers for Braga questioned Paolo Croce, UBS’s European head of rates, at the continuation of the hearing today about the close relationship between proprietary traders such as Minayev, who trade with the bank’s money, and flow traders like Braga, who execute orders on behalf of clients.


“All the other flow traders followed the direction of Mr. Minayev,” Braga’s lawyer said.


Croce said while flow and proprietary traders exchanged information, they weren’t supposed to take instructions on pricing.


Minayev had told Braga, “I need this to move,” according to Croce. “He told him ‘I’m down $9 million today.’”

Here are some preliminary question to set prosecutors on their marry way?

  • How many times did JPM's CIO office "procure a false quote"?
  • How many times did Iksil tell his middle office or subordinates: "I need this to move" - and if he kept it to himself, how many times did Iksil "make it move" on his own?
  • How many times did the CIO "shift the IG-9 market and give a completely false picture?"
  • How many times did Iksil get an external "quote" that overrode the official closing day MarkIt price, or, far worse, did JPM ever tell partially-owned MarkIt what mark to use for a given product, which would be an act of unprecedented illegality.

And this is just the beginning. The reality is that with this revelation it likely means that JPM is probably lying about the fair value of thousands if not millions of other OTC-based products. Which goes to one simple thing: 

Non-existent internal controls!

Because while JPM can blame an entire prop trading office for a pair trade gone wrong, it will have a very tough time explaining how marks impacting billions in P&L could have sneaked past the middle and back office.

Which, however, is possible, at least in theory. 

This brings us to MarkIt - a company that has long been in the public eye for being the primary source of CDS marks, which would be great if not for one small glitch: it is also partially owned by the same banks which stand to benefit if MarkIt "nudges" the market in one way or another.

The following report from Mark Mitchell from 2009 does a great job of exposing some of the potential dirt that MarkIt may be involved in, and raises some critical questions that have never been answered, and which if addressed in the past could have spared JPM shareholders, and potentially US taxpayers, billions in losses:

Did The Markit Group, A Black-Box Company Partially Owned By Goldman Sachs and JP Morgan, Devastate Markets?


Last year, the media reported that New York Attorney General Andrew Cuomo had sent subpoenas to Markit Group as part of an investigation into possible manipulation of credit default swap prices by short sellers. This investigation, like Mr. Cuomo’s other investigations into market manipulation, have yielded no prosecutions.


The Department of Justice is reportedly investigating Markit Group for anti-trust violations. This investigation (which is reportedly focused on how Markit Group packages and sells its information) seems to acknowledge that Market Group has near-monopolistic control of information about credit default swap prices. However, if the press reports are correct, the DOJ has not considered the possible appeal of this monopolistic control to market manipulators.


Meanwhile, Henry Hu, the director of the Securities and Exchange Commission’s division of risk, has said that it has been nearly impossible for the SEC to conduct investigations into any matter concerning credit default swaps because the commission does not have access to any data on the trading of CDSs. In itself, this is a shocking admission.  It is all the more shocking when one considers that the necessary data exists and might be in the hands of The Markit Group – a black box company based in London.


A thorough investigation of Markit Group is urgently required.


Here is what we know so far:

  • Markit Group was co-founded by Rony Grushka, Lance Uggla, and Kevin Gould. Prior to founding Markit Group, Mr. Grushka’s main line of business was investing in Bulgarian property developments. He recently resigned from the board of Orchid Developments Group, an Israeli-invested company based in Sophia, Bulgaria. Messrs. Uggla and Gould formerly worked for Toronto-Dominion Bank in Canada.
  • Markit Group’s founders also include four hedge funds. However, Markit Group refuses to disclose the names of those hedge funds. In response to an inquiry, a Markit Group spokesman said it was “corporate policy” to keep the names of the hedge funds secret, but he would not say why Markit Group had such a policy. It seems worth knowing whether those hedge funds have any influence over Markit Group’s published information or indexes, and whether those hedge funds are trading on that information. It would also be worth knowing whether those hedge funds or affiliated hedge funds have engaged in short selling of public companies whose debt and stock prices were profoundly affected by the information that Markit Group published.
  • Goldman Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM) and several other investment banks also have ownership stakes in Markit Group. The investment banks received their stakes in exchange for providing trading data to Markit Group. It would be worth knowing whether these investment banks engaged in short selling ahead of Markit Group’s published indexes and price quotations.
  • Markit Group is secretive about how it creates its indexes. In early 2008, The Wall Street Journal noted that the CMBX simply “doesn’t make sense” and that Markit Group’s indexes “might be exaggerating the amount of distress” in the home and commercial mortgage markets. In 2008, the average prediction for defaults on commercial mortgages was 2%. The CMBX implied that the default rate could be four times that level.
  • When short seller David Einhorn initiated his famous public attack on Lehman Brothers, one of his central arguments was that the CMBX (the index that was likely “exaggerating the amount of distress”) proved that Lehman had overvalued the commercial mortgages on its books.
  • In March 2008, the Commercial Mortgage Securities Association sent a letter to Markit Group asking it disclose basic information about how the CMBX index is created and its daily trading volume. “The volatility in the CMBX index, caused by short sellers, distorts the true picture of the value of commercial-mortgage-backed securities,” the group said in a statement.
  • Markit Group is equally secretive about how it derives its “prices” for credit default swaps. A spokesman for the company spent close to one hour talking to Deep Capture. He did his job well and sounded like he was trying to be helpful. But he told us as little as possible.
  • However, in the course of this conversation, we did learn that Markit Group’s “prices” are not actual, traded prices. They are mere quotations. The Markit Group has what it calls “contributors” – hedge funds and broker-dealers that provide it with information. Markit Group has a grand total of 22 “contributors.” Deep Capture asked Markit Group’s spokesman for the names of these “contributors.” The spokesman said he would try to find out the names and call back later. He never called back.
  • The 22 “contributors” provide Markit Group with quotations, and these quotations become the Markit Group’s “price.” In other words, the “contributors” can quote any price for a CDS that they choose, regardless of whether anyone is actually willing to buy the CDS at that price. Markit Group looks at these quotations. Then it somehow decides which quotations make the most sense. Then it publishes information that purports to represent the actual market price of that CDS. This process is certainly unscientific. And it is ripe for abuse.
  • Consider, for example, the Markit Group “price” for CDSs insuring the debt of company X.  The Markit Group price strongly suggests that company X is going to default on its debt in the immediate future. Short sellers eagerly point to the Markit Group CDS “price” as evidence that company X is doomed. Panic ensues, and suddenly, company X really is doomed. But the fact is, nobody ever bought a company X CDS at the price quoted by Markit Group. Rather, that panic-inducing “price” was, in effect, pulled out of a hat. Who pulled it out of a hat? That is matter of immense importance. There are two possible scenarios:
  • The first possible scenario is that the 22 “contributors” report their quotations in good faith. They should be sending the actual traded price, not just a quotation, but assume they are just doing what was asked of them. From these quotations, Markit Group somehow decides what the “price” should be. It is possible that this decision is based on some secret formula (which would be worrisome); or it is possible that Markit Group executives sit around a table debating what the price should be and take a shot in the dark (which would be even more worrisome); or it is possible that Markit Group deliberately chooses the most horrifying price possible in order to assist the short sellers who are affiliated with its owners (which would be a matter for the authorities).
  • The second possible scenario is that Markit Group acts in good faith (if not scientifically), but one or more of the 22 “contributors” or their affiliates has an interest in seeing company X fail. If just one of those “contributors” sends in an astronomically high quotation, that could be enough. Markit Group factors the absurd quotation into its posted “price” and it suddenly becomes possible to convince the world that company X is about to default on its debt.  Panic ensues, the firm’s layer of debt dries up, the stock price plunges, and perhaps the “contributor” or its affiliate make a lot of money.
  • As Deep Capture understands it, CDS quotations suggested by the 22 “contributors” also help determine the movement of the CMBX and ABX indexes. The movement of these indexes did serious damage to the American economy in multiple ways. The  indexes prompted write downs at most of the major banks and mortgage companies. They were ammunition for short sellers, like David Einhorn, who claimed that companies had cooked their books by not writing down to the rock bottom prices suggested by the Markit Group indexes. They helped precipitate the decline in prices of mortgage securities, and contributed mightily to the panic that spread across the markets.  A lot of people made a lot of money as result of those indexes moving downward. So, it is rather important to know more about how those indexes are formulated, and if they can be driven by the same people who are making directional bets on their movements.

Conclusion: Ten years ago, there was no such thing as a credit default swap. Six years ago, a very small number of investors traded credit default swaps as hedges against the long-shot possibility of corporate defaults. Nobody looked to credit default swaps as reliable indicators of corporate well-being.


Then, suddenly, there were over $60 trillion in credit default swaps outstanding. That is, over the course of a few years, somebody had made over $60 trillion (many times the gross domestic product) in long shot bets that borrowers would default on their debt. As this derivative risk marbled through the system, the trading in credit default swaps was completely opaque. Nobody knew who bought them, who sold them, or at what price.



These “prices” were not prices in any meaningful sense of the term.  But, suddenly, these “prices” became perhaps the single most important indicator of corporate well-being. Assuming that those four hedge funds and the 22 “contributors” (or hedge funds affiliated with them) bet against public companies, it seems more than possible that short-sellers got to run the craps table, call the dice, and place bets, all at the same time.


So perhaps it is not surprising that a lot of long-shot rolls paid off quite nicely.

Bottom line: Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm.

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fightthepower's picture

Holly cow! This is getting good.

Fuck you Bernanke!

veyron's picture

Except with the fed they are downplaying the size of the balance sheet ...

markmotive's picture

But isn't fraud part of the banking game? (Sarcasm)

Documentary on Financial Fraud in Amerika:

Soul Train's picture

imagine that, meanwhile many Mainstreet businesses can't get trickle down loans for working capital.

These FED banksters are sickening.

Next year will be 100 years of money cartel corruption.



Comay Mierda's picture


articles like this are why ZH fucking rocks.  you think you'll hear about this shit on CNBC or in NYTimes?  maybe after a month or two.  this banking system is fucked


sunaJ's picture

Nice article, Tyler


I would like to think they give a damn and in good faith attempt to set a value for CDS, but I do not believe it.  What this means is at best, we have a bunch of f*cksticks pulling numbers out of their asses and at worst, we have a cabal of outright criminals that have destroyed the lives of thousands (millions?) of people the world over so that they can add more imaginary wealth to what is already obscene.  Well, my fellow Americans, they are all gathered right there together, consolidated for easy targeting.  Send in the drones to get the clowns.

Troll Magnet's picture

bring out the guillotine, bitchez!!!

Vampyroteuthis infernalis's picture

I have this philosophical dilemma. Which is more evil? The squid or the morgue? Life is puzzling.

hedgeless_horseman's picture



you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid.

 CDS and circus chicks...giant  S   P   R   E   A   D  S  , bitchezzz!!!

Rubbish's picture

Everyone want's to be a Barry Minkow

hedgeless_horseman's picture



I always wanted to be Bernie Cornfeld. I think it was the French chalet.  

"Do you sincerely want to be rich?"

What a fucking great tag line.  How do you top that?

nope-1004's picture

Blythe Masters, JPM head of commodity manipulation, is famous for inventing the CDS - an opaque, ambiguous, arcane, cryptic, nebulous POS like herself.

She needs to be thrown in jail.



Oh regional Indian's picture

Whaaaaat Nope.....Throw their Chief Innovation officer in Jail? hah! Never. If they could, all of Wall Street will wave her warmly into her sunset.

While the Bruno IsDead story is fascnating at so many levels, the bottom line (and this IS the bottom line, fractally, across business, personal and every other aspect of our lives), the biggest problem business iin the world is INSURANCE.

The whole CDS game can be wrapped up neatly like this:

CASINO + Fraudulent Insurance = Disaster

Imagine if a casino started selling Loss insurance. 

What would that do to their algos that make sure the house always wins? Imagine being able to walk into a casino and being able to Hedge your risk. What would that do to your betting patterns?

Easy enough to extrapolate. Ne?


Insurance companies are the root cause of the global financial mess. No way around that. Like all things, in it's hoary past, it might have made sense (probably did). 

Now, it is the chief swindler of people because it works on Fear. 

No wonder they are slowly making it mandatory...

Instead of tempering risk, it gave the world financial markets dis-temper. And now they are dying.

Is Bruno a Kill, or a Krill for the whale he once was?

Perhaps he will just be re-membered as...

More B Dick...





SwingForce's picture

Interesting point, and I agree. The 1987 crash was blamed on portfolio insurance. But how to explain the huge notional amount issued? 

Oh regional Indian's picture  insurance?


knukles's picture




In order to Permanently Eliminate any and all Future Confusion, Opaqueness and Obfuscation, I'd like to hereby propose the Mitchum-Bridges Rule adding a new Permanent Level 4 to all Financial Statement Disclosure.

Legend has it that many years ago Jeff Bridges, most nervously attending his first Academy Awards Ceremony was offered some comforting advice by his seat mate, Robert Mitchum who whispered in his ear; "Just remember kid, it's all just bull shit anyway."

It's all just bull shit anyway.
                 - Level 4 Disclosure

DeadFred's picture

It's really nice to see some details but the take home story is that JPM is manipulating the markets and cooking it's books to make obscene profits. Everyone raise their hands if this surprises you.

Real Money Wins's picture

According to Barak (Barry) Obama Jamie Dimon  is the smartest guy we have going!


Let's see what the smartest guy does next shall we!!!!!


Whoop to that!

RiverRoad's picture

I've got my knitting needles greased and ready to go.

jcaz's picture

LOL- sadly, it's not even that sophisticated-  these tools were just fluffing the bid/ask,  which can mean a lot when you're trading in 10 Jillion units......

It's something a pleeb trader wouldn't try,  but I guess when your reputation- or better yet, your boss Jamie's reputation- is teflon,  you're gonna give it a shot.

Dimon should be canned just for failing to keep an eye on his buddy for making such a grade-school move.....

spankfish's picture

"fluffing the bid"... you just made a Wall St. fluffer joke.

Common_Cents22's picture

Good businesses that employ a lot of people are dying on the vine because the capital has been pissed away on banksters.

tocointhephrase's picture

Occupation Records BITCHEZ!!!!!

Colombian Gringo's picture

Jamie Dimon is not worried. The stupid sheeple will gladly suck his micro dick and pay trillions to keep the criminal syndicate called JPM in business.

Excursionist's picture

Ask a Joe on the street what "CDS" is, and he'll tell you it's the 0.5% paper his credit union gives him in exchange for his money getting locked up for a few months to a few years.

When nuclear weapons were invented, the 'sheeple' saw pictures of explosions and devastating effects.  The sheeple could act (via voting, building bunkers, etc.) accordingly.

A decade after CDS hit OTC markets, the 'sheeple' are still oblivious to potentially devastating effects on their real economy.  The problem with this new generation of weapons is that it remains largely invisible to the Real-Housewives-of-[ ]-tuned-out-Prozac'ed-out public.

I can't decide whether I'm in the fuck-'em-they-should-get-what-their-ignorance-deserves camp or the shine-light-in-public-policy-discussions-so-OTC derivatives-are-run-through-clearinghouses camp.

PersonalResponsibility's picture

Like most table salt being iodized, why can't most $ be goldized?

veyron's picture

All $$ can be goldMANized err zucked

fockewulf190's picture

Lol, if you ask the average American what "CDS" means, most would probably tell you it's a drug store chain (CVS being close enough to fire of a few brain cells) and feebly attempt to give you some general directions how to find the nearest branch...and those directions will be wrong too boot.

Ghordius's picture

Exactly, and this applies not only to a Joe on the street, most politicians also have not understood what this business is about. And the very few people like the Tyler that wrote this great article also fall into thinking this is in any way "the way it is", witness: "At this point, Zero Hedge assumes that Iksil was merely abusing the little loophole used by every CDS trader since time immemorial...".

CDSs and all those new derivatives are not "immemorial". They were forbidden for three generations in the 20th Century.

They are the true "Ponzi Scheme". They are the true "Casino banking". They are not insurance and they are not sane.

BAN THEM before it get's worse.

Excursionist's picture

Respectfully, I disagree about banning derivatives.  It's my libertarian side coming through, I guess...  But if two fund managers, prop desks, HNIs, etc. want to gang bang themselves into oblivion through leveraged directional bets, I say, "Let them."  But let them gang bang in a walled environment, where the ripple effects don't permeate to the real economy.

Caviar Emptor's picture

Tyler, congrats. And Gringo, agree. We shall bail with certainty and bold confidence. We shall bail. 

RiverRoad's picture

Re Jaime Dimon: 

    This "threatens his very position"?  Oh yippee.  The world will be such a better place when that lying, fatuous ass is gone.

AlaricBalth's picture

I was pounding the table about this kind of crap occurring two weeks ago. On multiple posts I talked about the "creative" price discovery on Level 3 assets.

From 5-15-12. : These banks are able to obstruct price discovery on Level 3 assets which allows them to conceal losses. They book gains immediately as they occur, for obvious reasons, but delay reporting losses through the suspension of trading on certain Level 3 assets thereby manipulating price discovery which lets them hold back reporting of losses until they get too big.

Comay Mierda's picture

dont worry, the regulators will get right on that

JLee2027's picture

Final Victory is in sight.

Troll Magnet's picture

nah. all the porn sites are still up and running. the regulators won't do shit.

JLee2027's picture

I know. Final Victory is WWII sarcasm.

Caviar Emptor's picture

To be clear, it s the fault of the regulators asleep at the switch. As opposed to last week when they were screamimg about too much regulation. 

LongSoupLine's picture




lol...and here we thought the silver short was going to be the sinker.

Xkwisetly Paneful's picture

Very informative!

The US invented not only financial fraud but fraud period,

that's why the US bonds traded under costs 12/08 while shit was hitting fan long before he was buying them himself. Because of the US of Fraud.


Hard to believe they cheat and still lose.

But then again after reading posts around here, most would lose with tomorrow's paper so anything's possible.


cranky-old-geezer's picture



But isn't fraud part of the banking game?

The banking system is built on fraud, from the ground up.


Surely a golden parachute is forthcoming in the bizzaro world we live in. 

sitenine's picture

Right as usual SF.  We'd rather jail a pastor for preaching corporal punishment than ever think about arresting a banker these days.  The World has gone quite mad.

Buck Johnson's picture

Didn't the fed just allow banks to put CDS on the federal balance sheet.  So when the people come looking for their payments the fed will have to pay and not the banks.

LeonardoFibonacci's picture

Fire Dimon without compensation, just a kick in the nuts if he has any!

Bay of Pigs's picture

That's why he goes by Legs Dimon. He's a fucking crook.

PianoRacer's picture

Uh, hello?!

Jamie Lannister?! 

PianoRacer's picture

Damn, nevermind.

It/s Jaime Lannister. Fuck that Demon guy!