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So Much For the 'Epic' JPM 'Whale-Trade' Unwind

Tyler Durden's picture





 

Last night's release of DTCC CDS data came and went with little furor. Despite the protestations of various mainstream media reporters last week that they had been 'told' that JPM had unwound 65-75% of their IG9 disaster last week, their is nothing in the actual reported data from the CDS repository to suggest any 'epic' unwind or change in actual risk transfer occurred. We hate to say we told you so but the spike in activity was very likely associated with the CDS roll as all those Weinstein-wannabes unwound their index-arb positions (sold back their index protection and bought back their single-name protection) as opposed to face the illiquidity cliff of holding through the roll. The last few weeks have seen index net notionals drop for IG9 - which fits with the index-arbitrage unwind - but little to no change in the tranched risk (which is the more appropriate to track JPM's exposure) suggesting that JPM remains the 'diligent shareholder-friendly' holder of its tail-risk hedge just as Dimon said they would.

 

IG9 10Y Index skew (orange) reverted to zero (green oval) which is what you are trying to achieve if you are an index arbitrageur (primer - you are trying to arbitrage the difference between the index value and the value that the underlying portfolio of names is implying the index should have) - so of course there was dramatic activity last week in the IG9 10Y index (and single-names I am sure) as profits were taken.

 

Chart: Barclays

Weinstein said this week that SABA has exited the index-arb position - which is entirely not surprising as the roll is the perfect time to exit this kind of position especially given the convergence of the 'richness' of the index.

 

No 'epic' signs of unwinds in tranched risk and the slide in net index notionals fits perfectly with an unwind of the hedge-fund-based index-arbitrage unwinds into the CDS roll (and fits with the chart above - the green oval - as the skew was around zero and hedgies exited with their nice profit).

 

Bottom line - There is no evidence in the actual risk transfer market data that JPM has unwound any sizable exposure in the whale trade. If one believes they have unwound some index exposure then given the lack of movements in the tranched data, they are now considerably more 'naked' exposed in their tail-risk hedge tranche position - which means - if Bernanke or Draghi fire the tail-risk-smashing bazooka anytime soon, then a hideously under-hedged compression in correlation will mean dramatic losses for this position.

So which is it?

  • JPM has not unwound 'much' of their hedge position (which actually made sense given the global macro environment we face - but was managed very poorly); or
  • JPM has unwound some of the index hedge 'delta' used to manage the position but remains in the tail-risk hedge and therefore far more exposed to a central bank liquidity injection

 

Heads they lose, Tails - well they lose?

Data: DTCC

 


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Wed, 06/27/2012 - 09:52 | Link to Comment Conman
Conman's picture

http://in.reuters.com/article/2012/06/26/saba-jpm-idINL2E8HQEWO20120626

Interesting, why would Saba capital not quash this then?

Wed, 06/27/2012 - 10:11 | Link to Comment credittrader
credittrader's picture

Why would they quash it? I would expect them to have exited the arb position (just as Tyler noted above) given the convergence to zero of the skew. Remember - SABA did not have the OPPOSITE trade on to JPM, they had a trade on that had a leg which was opposite to one leg of JPM's trade. Given the skew reversion and CDS roll, I would be surprised if anyone is left in the arb space and so the net notional is now 'cleaner' from a risk perspective and maybe we'll get some insight from here on JPM's unwind.

Wed, 06/27/2012 - 10:22 | Link to Comment sessinpo
sessinpo's picture

Saba, $5B fund up 2.3% is only $115M. Pocket change and on top of that, we don't know how much was attributed to that JPM trade. They could have made more or less.

Wed, 06/27/2012 - 09:55 | Link to Comment pods
pods's picture

Save the whales?

Wed, 06/27/2012 - 11:52 | Link to Comment Carl Spackler
Carl Spackler's picture

Precisely, pods.

Except this activism is being orchestrated by "Green Piece"...Jamie Dimon's personal wealth fund.

Wed, 06/27/2012 - 09:57 | Link to Comment AccreditedEYE
AccreditedEYE's picture

Peter Tchir will not be happy to see a JPM whale trade headline on Zero Hedge. Can someone please tell me when he turned traitor and went full retard on a happy ending for Europe and the globalist, Neo-Keynesian agenda? And, really Peter, your last piece "Smelling the Roses" http://www.tfmarketadvisors.com/ ended in such a....how shall I say?... nauseating Jim O'Neill-ish fashion.  Really, really sad.

Wed, 06/27/2012 - 10:03 | Link to Comment Christoph830
Christoph830's picture

It's simple.  Follow the money trail.  Who's pulling Peter's strings now?

Wed, 06/27/2012 - 10:39 | Link to Comment Stoploss
Stoploss's picture

It's definitely a head scratcher..

Wed, 06/27/2012 - 09:57 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Gotta love ZH.  It's real simple, you will know that these trades have unwound when you start seeing the explosions and smelling the smoke.  The MSM is now naked too.  All paper is junk, but until the counterparties start making calls no effect

 

Wed, 06/27/2012 - 09:58 | Link to Comment BlackGoldTexasTea
BlackGoldTexasTea's picture

Don't lie, Tyler.  You love to say we told you so.

Wed, 06/27/2012 - 09:58 | Link to Comment Christoph830
Christoph830's picture

Brilliant analysis.  I'm sure Jamie Dimon has been very vocal at recent NY Fed meetings about the "moral hazards" of central bank intervention and the need to let the "market" find its own way.

Catch-22 baby

Wed, 06/27/2012 - 10:01 | Link to Comment midgetrannyporn
midgetrannyporn's picture

at least jpm doesn't manipulate markets (like barclays) [/sarc]

Wed, 06/27/2012 - 10:01 | Link to Comment Village Smithy
Village Smithy's picture

How cool would it be to hit Vegas and start laying down large bets, attracting the ladies, getting comped this and comped that knowing all the while that Daddy will pay the tab if the "gambling system" doesn't work out?  Well Mr. Dimon, how cool is it?

Wed, 06/27/2012 - 10:48 | Link to Comment Bob
Bob's picture

Jamie and his ilk, if they understand the question, strongly resent your insinuation.  They go to all the right schools to meet the right people and learn the right stuff in order to get the right jobs necessary to control all the money.  They earn their way and always have in their minds, dear muppet.

Gambling is bad, especially with bank money:

 

http://news.yahoo.com/blogs/sideshow/detroit-man-gambles-away-1-5-million-accidentally-191619543.html

Wed, 06/27/2012 - 10:16 | Link to Comment Nonexistent Uni...
Nonexistent Uninvented God's picture

So long and thanks for all the all the fish.

Wed, 06/27/2012 - 10:17 | Link to Comment chinaboy
chinaboy's picture

Order - canceled - Order - canceled. High frequency manipulation is everywhere. For main stream media, just a cancel can make a big transactrion.

Wed, 06/27/2012 - 10:38 | Link to Comment spanish inquisition
spanish inquisition's picture

A previous article opined that JPM is hedging for the FED (presidential cufflinks and all that), how does this correlate to that position?

Edit: assuming that it isn't the other way around and the FED is providing the hedge to all the TBTF bank owners.

Wed, 06/27/2012 - 10:46 | Link to Comment Jack Sheet
Jack Sheet's picture

Excellent explanatory post. But Just incredible to be reminded again that these mega-salaried  f**ks are producing absolutely  nothing of value for the economy or society, just re-enacting "lawnmower man" in their virtual world of abstractions in front of a terminal.

Wed, 06/27/2012 - 11:21 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

this will make the third time i have posted on zH that the jpMorgue is almost certainly dealing with any stress or "disaster book loss" from  by adding positions [like LTCM] rather than paying to take their spread and plays down

so of course this would be the only possible result to the most likely scenario since day fuking #1

double-duh here, BiCheZ!

Wed, 06/27/2012 - 11:43 | Link to Comment NotApplicable
NotApplicable's picture

As long as they remain an agent of the US Treasury, I can't see them moving away from risk anytime soon.

Wed, 06/27/2012 - 11:56 | Link to Comment tony bonn
tony bonn's picture

jpm's whale trades are a massive neutron bomb - they will decimate all counterparties and collateral partners, but jpm will be bailed out with however many trillions is required....their ir swaps are in the process of total meltdown and the radiation poisoning will linger for years to come....anyone who thinks that jpm is solvent, liquid, or financially viable is a fucktard.

Wed, 06/27/2012 - 17:10 | Link to Comment Random_Robert
Random_Robert's picture

Nothing changes unless/until JPM's depositors begin the "withdraw and go deposit elsewhere" process.

 

 

Thu, 06/28/2012 - 03:42 | Link to Comment hbkshivamgoel
hbkshivamgoel's picture

I didnot understand that bit..how does getting more QE( bazooka) lead to widening of the arb ( and increase losses for JPM)

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