The "World's Largest Prop Trading Desk" Just Went Bust

Tyler Durden's picture

A month ago we warned that JPM's CIO office is nothing short of the world's largest prop trading desk. Not only were we right, but what just transpired is just shy of our worst possible prediction. At the end of the day, the real question is why did JPM put in so much money at risk in a prop trade because we can dispense with the bullshit that his was a hedge, right? Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least "net" is not "gross" and we know, just know, that the SEC will get involved and make sure something like this never happens again.

As for what we said before, we will just repost the whole thing as we were, once again, right.

From April13: Why JPM's "Chief Investment Office" Is The World's Largest Prop Trading Desk: Fact And Fiction

For the fiction, we go to JPM's conference call transcript where we had the following disclosures.

  • "I did want to talk about the topics in the news around CIO and just take a step back and remind our investors about that activity and performance. We have more liabilities, $1.1 trillion of deposits than we have loans, approximately $720 billion. And we take that differential and we invest it, and that portfolio today is approximately $360 billion. We invest those dollars in high grade, low-risk securities. We have got about $175 billion worth of mortgage securities, we have got government agency securities, high-grade credit and covered bonds, securitized products, municipals, marketable CDs. The vast majority of those are government or government-backed and very high grade in nature. We invest those in order to hedge the interest rate risk of the firm as a function of that liability and asset mismatch."
  • "We hedge basis risk, we hedge convexity risk, foreign exchange risk is managed through CIO, and MSR risk. We also do it to generate NII, which we do with that portfolio. The result of all of that is we also need to manage the stress loss associated with that portfolio, and so we have put on positions to manage for a significant stress event in Credit. We have had that position on for many years and the activities that have been reported in the paper are basically part of managing that stress loss position, which we moderate and change over time depending upon our views as to what the risks are for stress loss from credit. And I would add that all those positions are fully transparent to the regulators. They review them, have access to them at any point in time, get the information on those positions on a regular and recurring basis as part of our normalized reporting. All of those positions are put on pursuant to the risk management at the firm-wide level. They are done to keep the Company effectively balanced from a risk standpoint.... " Of course, when you own the regulators, it is not much of an issue... And would it be the same regulators who we have now confirmed don't understand the first thing about markets?
  • "The last comment that I would make is that based on, we believe, the spirit of the legislation as well as our reading of the legislation and consistent with this long-term investment philosophy we have in CIO we believe all of this is consistent with what we believe the ultimate outcome will be related to Volcker."

For the facts, we go to Bloomberg again, which was the first to break the Bruno Iksil story, and which exposes without shadow of a doubt why the Chief Investment Office is nothing but the world's largest prop desk. But hey, just as Goldman named it frontrunning service the "Asmymetric Service Initiative" thereby magically not making it a frontrunning service, naming the world's largest prop desk the "Chief Investment Office" makes it no longer be the world's largest prop desk.

Here are the highlights. First on the CIO group:

  • Achilles Macris, hired in 2006 as the CIO’s top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said.
  • Some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms.
  • The CIO’s growing size and market power have made it an increasingly important customer to Wall Street’s trading desks and a market influence watched by hedge funds and other investors, the former employees said. Iksil’s positions in credit-derivatives have become so large that some market participants dubbed him “Voldemort,” after the villain of the Harry Potter series who’s so powerful he can’t be called by name.
  • What Bernanke is to the Treasury market, Iksil is to the derivatives market,” Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP in Los Angeles, where she helps oversee $32 billion, said in a telephone interview.
  • Macris’s team amassed a portfolio of as much as $200 billion, booking a profit of $5 billion in 2010 alone -- equal to more than a quarter of JPMorgan’s net income that year, one former senior executive said.

And far more importantly on the background of the guy behind it all. It kinda, sorta sounds like he is a... gasp.... prop trading kinda guy

  • It’s Macris, not Iksil, who was behind the strategy that led to an unprecedented build-up of credit risk in JPMorgan’s chief investment office, three former employees of the bank said. While they expressed doubt Iksil can unwind his positions without causing a dislocation in the markets he trades, they also said JPMorgan probably can afford to hold the assets until they mature and so won’t be forced to sell them.
  • In 2011, corporate revenue of $3.3 billion included $1.6 billion of securities gains and produced $411 million of net income, the bank said in an annual filing on Feb. 29. By comparison, JPMorgan’s investment bank reported $26.3 billion in revenue and $6.8 billion of net income in 2011.
  • Since 2007, the value of securities held in JPMorgan’s chief investment office and treasury has more than tripled to surpass $350 billion from $76.5 billion, according to company filings.
  • Profit, not risk management, guided the purchases, according to the former employees. One of the employees, who previously held a senior executive position at the bank, said Dimon even ordered some of the trades himself.
  • Dimon pushed the unit to seek bigger profits by buying higher-yielding assets, including structured credit, equities and derivatives, and ramping up speculation, according to two former employees.
  • In London, Macris expanded his team, adding expertise in credit and fixed-income trading. A Greek citizen, Macris previously was co-head of capital markets at Dresdner Kleinwort Wasserstein before joining JPMorgan in 2006. In that role he helped oversee a unit that made proprietary trades, or bets with Dresdner’s own money, according to two people who worked with him at the time.
  • Before joining Dresdner, Macris oversaw currency trading at Bankers Trust, now part of Deutsche Bank AG. Macris was an idea- generating machine who was blunt and didn’t suffer fools, said Duncan Hennes, who worked with him at Bankers Trust.
  • At JPMorgan, Macris hired Evan Kalimtgis, a former head of credit portfolio strategy at Dresdner, to help with risk management, according to one former employee.
  • In 2007 Javier Martin-Artajo, who had been Dresdner’s head of credit-derivatives trading, joined JPMorgan in London. George Polychronopoulos, who worked at hedge fund Endeavour Capital LLP, also joined the London office in 2009.
  • Martin-Artajo, Polychronopoulos and Kalimtgis didn’t return calls and e-mails seeking comment.
  • While Macris had a mandate to make money from the beginning, he didn’t start putting on big bets until after the credit crisis in 2008. Two of the former executives said the following year he bought AAA-rated pieces of collateralized debt obligations. As competitors dumped securities and prices slumped, Macris’s group at JPMorgan emerged as the biggest buyer in some markets, said one former executive at the bank who was familiar with the trades at the times.
  • In one example, a New York-based CIO trader named Jonathan Horowitz bought about $1.1 billion of AAA-rated portions of collateralized loan obligations for about 80 cents on the dollar in November and December 2008, people familiar with the matter said at the time. Horowitz declined to comment.

Finally, the most damning evidence that JPM's World's Biggest Prop DeskTM, elsewhere known as the CIO, has to be dismantled lest it suffer the fate of all other massive prop desks, which promptly blew up in the days after the Lehman failure, is the following:

  • One public sign that the chief investment office does more than hedge: Its trading risk is on par with that of JPMorgan’s investment bank.
  • JPMorgan’s annual report for 2011 shows that the CIO stood to lose as much as $57 million on most days of the year. That compares with $58 million for the investment bank, which includes Wall Street’s biggest stock- and bond-trading units.
  • Another sign: The relationship between the CIO and the investment bank’s sales and trading desks is strained, two former employees said. Employees in the CIO get a smaller share of their trading profits than those in the investment bank, giving Dimon a cost-management incentive to direct more trading through the CIO, one former executive said.

Hence: JPMs "Chief Investment Office" = World's largest prop trading desk. But hey, just repeat "Assymetric Service Initative" ... "Assymetric Service Initative"  ... "Assymetric Service Initative" three times ... and it becomes truth.

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Careless Whisper's picture

why, you ask?  because they own a printing press.

 

B-rock's picture

BusinessWeek interview explaining Iksil's trades back in April (for those who didn't pay attention): http://www.businessweek.com/videos/2012-04-09/jpmorgan-traders-swap-bets 

 

Aziz's picture

Max Keiser is wrong —

You don't have to buy silver to crash J.P. Morgan

Their prop desk, sorry, I mean CIO "risk management" desk will crash them for you.

(yes — a risk management desk that increases risk — and right there we have the fucking textbook definition of iatrogenesis).

knukles's picture

iatrogenesis...

As in taking it up the ass so badly by JP, Goldilocks, et.al ever so badly you no longer qualify for the classic last in line skull fucking.

Comay Mierda's picture

now it makes sense why JPM took MF Global money.  prob covering what losses they could.

and remember - there is NEVER just one cockroach

Pinto Currency's picture

 

 

The Fed is blowing up. 

Bloomberg and JPM trot out prop trading and chatter about these problems.

David Stockman's article re. the Fed: http://www.testosteronepit.com/home/2012/5/9/the-emperor-is-naked-david-stockman.html

Eye on the Fed.

Central Bankster's picture

I wonder how many shares those idiots Munger and Buffett own?  Another "productive" asset they were referring too?

Paul Atreides's picture

Everbody I mean EVERYBODY should go out and buy some physical silver tomorrow, doesn't have to be a lot if we can get everyone on board we can do some damage. With JP Morgan floundering NOW is the time to put the squeeze on those naked shorts.

Second Friday in May? Time to take the silver away!

#SILVERFRIDAY

Start spreading the word tweets have been started, loop in hash tags like #endthefed #ronpaul #crashjpm #crashjpmorgan #silver #gold #commodities #tbtf #jpm

I will commit to a tube of silver maples 25oz.

Buckaroo Banzai's picture

$20 billion?? 'tis only a flesh wound!

CharlieSDT's picture

I'll pick up a couple rolls of quarters.

Trimmed Hedge's picture

And I'll just pick up some of these shiny nickels in front of that steamroller....

LetThemEatRand's picture

Oxygen gets you high. In a catastrophic emergency, you're taking giant panicked breaths. Suddenly you become euphoric, docile. You accept your fate. It's all right here. Emergency water landing - 600 miles an hour. Blank faces, calm as Hindu cows.

-- Tyler Durden

shanebondy's picture

A shitload hopefully....  but they still think the credit-bandwagon will roll forever

boogerbently's picture

How many times do we need to hear the....."and make sure something like this never happens again", before SOMETHING is done???LOL

tom a taxpayer's picture

Jamie - Seek help at Gamblers Anonymous.

The Limerick King's picture

 

 

A verse on a terrible tale

Involving a JPM whale

To fill his own tank

He fucked the whole bank

The problem with Too Big To Fail

Rahm's picture

Why are primary dealers being assassinated?

banksterhater's picture

Why AREN'T the Primary Dealers ...!?

Rahm's picture

Countrywide, Lehman, Bear Stearns, ML, MF - deceased/kidnapped

JPM, HSBC, CITI, BAC, CS, etc - on life support/in coma's

FEDbuster's picture

Look for bounced check fees to increase and another attempt at the debit card transaction fee.  

AlaricBalth's picture

Big meeting going on tonight at 33 Liberty Street. (That's the FRB NY for those not from NYC). Dudley called in the boys and is not pleased. Wants to know who else may have this crap coming down the pike.

roadhazard's picture

Anyone who uses a debit card is a dumb ass and deserves every fee they get.

Paul Atreides's picture

All trolls were ordered to report in and head to the main stream media threads for damage control...

Tsunami Wave's picture

Man.  It's times like this that make me miss Trav7777 and RoboTrader.  Though Robo would be nowhere on news like this.

TravsMom's picture

Me 2, I miss my Trav.  The little bitch owes me money!

Ms. Erable's picture

He was last seen strolling towards 1600 Pennsylvania Ave. with a pair of kneepads thrown o'ershoulder, whistling, grinning, and occasionally muttering something that sounded to passers-by like "... better than Monica... heehee!".

WillyGroper's picture

Max Sphincter?

Civis Mundane

Waterfallsparkles's picture

Comay Mierda,

You make an interesting point.  If JPM took MF Global Customers Money.  It could have been used to prop up their positions.  Plus, if you remember there were a lot of people that got Margin calls and had to liquidate their positions.

If JPM casued the loss of Customer Accounts by not putting the Money that they received from a trade by Mf Global with Goldman back into Mf Globals Account intentionally.  Could this have been done to better their positions in Gold and Silver.  Remember a lot of people did not get the Gold that they had bought thru options.

HMMM.  Makes you think.

Missiondweller's picture

No kidding! Wasn't that the lesson of the 2008 crisis? If one is doing it they are ALL doing it to some degree. Which means we may very well start hearing about other banks having blown up over the next several months.

 

Remember when Bear's funds blew up? It took several months before it filtered down to other banks but we found out they were all holding similar bags of crap.

Dr. Engali's picture

If you have something to say just say it. Don't hold back.

Tsunami Wave's picture

Hey.. sometimes, silence is golden.

pavman's picture

The last time I saw duct tape, it was leopard print.  Apparently leopard print, duct tape purses are all the rage for 12 year old girls. Yikes!

jamezelle's picture

I bet their CIO desk appropriately managed their risk by shorting JPM stocks. lol

LawsofPhysics's picture

Don't worry the other arms of JPM have been short financial stocks for quite some time. Nothing like front-running yourself.

GetZeeGold's picture

 

 

Paging Ben Shalom......cleanup on aisle 5.

 

 

stocktivity's picture

Have to wonder how much of this crap is re-hypothecated and how all that will work out when they are forced to start selling tomorrow.

knukles's picture

Why would JP Fuckem take a loss on customer positions, you ask?

 

Becasue they were not customer positions.
Blythe fucking lied to the regulators, press and muppetts. 
On the telly.  Duh. 

But they were hedged.
What's hedged got to do with customer positions?
Nothing you ask?
Nopthing, they say.
On my.....
Will they be held accountable?
Fuck no.
What does this mean for the Volcker Rule?
(chortle)  Never heard of it.
What about the silver manipulations?
What are you talking about, they're client positions.
Which are client positions?
The client positions.
No, I mean the silver.
What silver?  

Who's on first? 

Urban Roman's picture

... digital mining techniques ...

RacerX's picture

It will be interesting if they ever have to unwind their short silver/PM positions.

sunaJ's picture

They can't.  That is one of the reasons it has been manipulated.  Start with a small lie and well, you know how that goes...

GetZeeGold's picture

 

 

Protect the hypothecation at all costs.....but we didn't mean that much.