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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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Thu, 05/10/2012 - 20:26 | 2415556 xela2200
xela2200's picture

It depends if the spot is based on ownership meaning that contract leased has only ONE owner, so it is based on actual ownership on a specific lot (no hypothication). Arbitrage WOULD prevent manipulation and facilitate true price discovery since the Physical price would dictate paper and in turn prevent all these paper games.

I have been trying to find out what is the deal, but Chinese are not big on disclosure.

Thu, 05/10/2012 - 20:05 | 2415517 Sathington Willougby
Sathington Willougby's picture

 

Squeal like a piggie for me, taxpayer boy.

Thu, 05/10/2012 - 20:19 | 2415550 alfred b.
alfred b.'s picture

 

   link to Shanghai exch:    shfe.com.cn   and click on engl.

 

     ...and I suppose that they could get big...if they wanted to:  they got the bucks to power it, so it's up to them!   At the crimex we,re just bystanders.

 

 

Thu, 05/10/2012 - 20:18 | 2415557 PeterSchump
PeterSchump's picture

Now if the scum will only go out of business, then there might be just a bit of justice.

Thu, 05/10/2012 - 20:20 | 2415561 dolph9
dolph9's picture

Get ready to drop your shorts and turn around, American peons!

Thu, 05/10/2012 - 20:34 | 2415633 xela2200
xela2200's picture

Sheep please.

Jesus I was wondering what all the PM bashing was all about. Even this site was full of trolls like never before. The bastards were flushing their crappy positions. The COT this week will be telling.

Thu, 05/10/2012 - 20:35 | 2415612 unemployed
unemployed's picture

Madoff,  MF Global,  JP Morgan ...   connect the dots ...

Warren Buffet called them weapons of mass destruction ...  in what was it? 2004?  when he bought that insurance company with the Gecko?

So Jefferson County pay back time???   These synthetics, CDOs, ABCDOs, CDS,  should be illegal for children, non  profits,  and governments,  especial pension plans.

Time for JP Morgan to go into rehab.

Thu, 05/10/2012 - 20:31 | 2415621 Pancho Villa
Pancho Villa's picture

When I go to Las Vegas, I always hedge the cost of my trip by making a few offsetting investments at the slot machines.

All those rules against prop trading are meaningless when any bet can be called a hedge.

Thu, 05/10/2012 - 20:42 | 2415678 Elmer Fudd
Elmer Fudd's picture

Are Chase deposits going to soon "vaporise?"

Thu, 05/10/2012 - 21:09 | 2415718 Withdrawn Sanction
Withdrawn Sanction's picture

Are Chase deposits going to vaporize?

Good question.  Or do they pull a BAC and shove all the bad derivatives under the FDIC side of the house?

Thu, 05/10/2012 - 20:51 | 2415706 orangegeek
orangegeek's picture

Dow Jones Industrial 30 just became 29.

 

Elliott Wave primary count on the Dow is bearish.

 

http://bullandbearmash.com/chart/dow-jones-daily-9-2012/

Thu, 05/10/2012 - 21:00 | 2415737 anyways
anyways's picture

JPM never would disclose anything just close to a billion loss. Obviously the management decided to go public with this thingy, because it is too huge to hide and personell too risky to be quiet. I expect JPM to loose 50 billion on this. It's always half the nominal. Good luck with this JPM :-)

Thu, 05/10/2012 - 21:02 | 2415741 holdbuysell
holdbuysell's picture

"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."

Seems to me a clever hedge fund with firepower would be all over this weakness, making the sentence change slightly:

they also said JPMorgan probably can't afford to hold the assets until they mature and so will be forced to sell them at firesale prices.

Just sayin...

Thu, 05/10/2012 - 21:21 | 2415798 chump666
chump666's picture

Correct and I'll bet (which I am) that the corporate CDS market will collapse after this JPM rogue trade. There is no way around this, losses will keep piling up and money on one or several 'other' investments banks are caught in the wipe-out.

...and the market wants to re-align a rally, insanity.

Thu, 05/10/2012 - 23:02 | 2416119 Tijuana Donkey Show
Tijuana Donkey Show's picture

Paging George Soros, paging George Soros. Your needed on the floor please. 

Thu, 05/10/2012 - 21:05 | 2415749 israhole
israhole's picture

It's all a big fat joke on the Goyim.

Incogman.net 

Thu, 05/10/2012 - 21:29 | 2415833 Cosimo de Medici
Cosimo de Medici's picture

Is it just too obvious, which is why no one has mentioned it yet?  Well, I'm new enough not to have any pride, so here goes:

Macris is JPM's Achilles heel?

The NYPost wouldn't be shy about stating the obvious.

Thu, 05/10/2012 - 21:50 | 2415914 Spectre
Spectre's picture

JPM as corrupt as they are will continue to play the games as one of Wall Streets Casinos. $2 Billion isn't shit.  Now, if some derivative action starts to cascade quickly it will be fun to watch the dismembering of Dimons empire.

Thu, 05/10/2012 - 21:53 | 2415917 kahunabear
kahunabear's picture

We hedge basis risk, we hedge convexity risk, foreign exchange risk is managed through CIO, and MSR risk.

Sounds like they have a good handle on things, ha.

 

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.

 

Well, that makes me feel a lot better, sheesh.

Thu, 05/10/2012 - 22:09 | 2415982 thedrickster
thedrickster's picture

Shalom BrownBeard is putting a new coat of wax on his shiny new resolution authority.

Thu, 05/10/2012 - 22:43 | 2416063 widget
widget's picture

Thank god (Blankfein) that the technocrats are in charge of Europe.

Let's hope they never mark-to-market Europe.

Thu, 05/10/2012 - 23:01 | 2416121 breakyoself
breakyoself's picture

CNBC: Why aren't retail investors participating in the market...they missed the rally.

Today should be the death knell and they should not have to ask that stupid ass question anymore.

Thu, 05/10/2012 - 23:36 | 2416167 Libertarian777
Libertarian777's picture

umm, dumb question but how is a DV01 of $200m = 'hedged basis risk'?

Thu, 05/10/2012 - 23:49 | 2416179 Au
Au's picture

It's good to be right.

Thu, 05/10/2012 - 23:51 | 2416187 loveyajimbo
loveyajimbo's picture

Break the news to Gensler gently, he, if startled, could do severe damage to Blankfein's pecker...

Fri, 05/11/2012 - 00:08 | 2416216 fatsak
fatsak's picture

This is all part of the master plan.   Everyone goes bust at once, and the reset button is hit with a bunch of dictators ruling all over at the commands of the bankers.

Fri, 05/11/2012 - 10:40 | 2417303 Juan Carlos Cantu
Juan Carlos Cantu's picture

JPM is framing the problem in terms of "using a different VaR" model from the one used in 2011. They did the trades, then valued risk the positions with a lousy model that doesn't resemble reality and trusted the model too much. That's the problem when models doesn't reflect reality.

http://thechinonomist.blogspot.com/2012/04/as-delicate-as-butterfly.html

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