Risk Management

About That Boaz Weinstein London Whale Bulls-Eye

Two days ago we made a simple observation: back in September 2011, Weinstein's firm SABA Capital hired one of the key JPMorgan prop traders - Maitland Hudson - who "ran JPMorgan’s proprietary trading of derivatives tied to commercial-mortgage bonds" and whose future job at Saba would "focus on relative value trades" - such as, perhaps, IG9 10 Year versus a basket of tranched trades... Our suggestion was that instead of being a brilliant credit trader as he has been called by Bill Ackman, and his antics while in charge of the DB prop desk certainly put theory in jeopardy, perhaps Weinstein is merely a wonderful headhunter: one who knows just whom to hire and when (kinda like Steve Cohen hiring key Pharmaceutical company R&D personnel in a perfectly legal transaction now that expert networks are done, but that is a topic for another day).

Guest Post: Safe Haven - Could U.S. Markets Rally In A Global Decoupling?

Experienced investors try to avoid the "confirmation bias" trap by asking what supports the other side of the trade. Confirmation bias is our instinct to find data to support our position once it is taken. To counter this bias, we must attempt to build a plausible case against our position. If the effort is sincere, we gain a fuller understanding of the market we are playing (or perhaps avoiding). That the global economy is going to heck in a handbasket is self-evident. If you over-weight anecdotal "on the ground" evidence and fade the ginned-up official statistics, it is obvious the global slowdown is picking up speed in Europe and China, two of the world's largest "linchpin" economies.

Frontrunning: May 21

  • Is Insider Trading Part of the Fabric on Wall Street? (NYT) ... uhm, next question
  • Nasdaq Says Glitches Affected Millions of Shares; IPO System to Be Redesigned (WSJ)... it's all the robot's fault... And the weather... And Bush
  • Special Report: The algorithmic arms race (Reuters)
  • Barclays to Sell Entire BlackRock Stake (WSJ) ... but they don't need the money... and it's not a market top.
  • BoE's Posen: some European banks need more capital (Reuters)... some?
  • Limbo on Bankia Undermines Confidence in Spain's Handling of Crisis (WSJ)
  • JPMorgan CIO Risk Chief Said to Have Trading-Loss History (Bloomberg)... a guy called Goldman, blowing up JPM... the irony
  • Pentagon's tone softens on Chinese military growth (China Daily)
  • EU summit to raise pressure on Merkel (FT)
  • Romney Super PAC raises less, still tops Democrats (Reuters)
  • JPMorgan’s Home-Loan Debt in Europe Increases Anxiety: Mortgages (Bloomberg)

LCH Hikes Margin Requirements On Spanish Bonds

A few days ago we suggested that this action by LCH.Clearnet was only a matter of time. Sure enough, as of minutes ago the bond clearer hiked margins on all Spanish bonds with a duration of more than 1.25 years. Net result: the Spanish Banks which by now are by far the largest single group holder of Spanish bonds, has to post even moire collateral beginning May 25. Only problem with that: it very well may not have the collateral.

It's Not Over Yet For JPM

IG9 10Y spreads re-surged today and were very choppy into the close as they broke back above 155bps (at 155.5/157.5bps now) for the first time since Mid-December with a 31% rip in the last two weeks. This fits perfectly with our ongoing thesis of this being a tail-risk hedge (not a simple 'spread' as other ignorant commentators presume) whose risk management has exploded in their face. While the skew (the difference between the index and its portfolio fair-value) has collapsed and arbs will be happy and likely exiting - the same correlation shifts (that we discussed earlier) that drove the big bank to sell more and more protection into a spread compressing market are now back-firing as systemic risk re-surges and the correlation shift is forcing them to buy back more and more protection into a spread decompressing market. Oh the fun of negative convexity - especially when you ARE the market and there is no-one to unwind the actual tranches to.

Guest Post: President Obama, The View, And The False Notion Of Too Big To Fail

From the 2008 financial crisis to Bernie Madoff, federal regulators have consistency proven too incompetent or too in-the-pocket to actually catch big disasters before they happen.  Their interests, like all government employees, are politically based.  State bureaucracies seek more funding no matter performance because their success is impossible to determine without having to account for profit.  There is never an objective way to determine if the public sector uses its resources effectively. The news of JP Morgan’s loss has reignited the discussion over whether the financial sector is regulated enough.  The answer is that regulation and the moral hazard-ridden business environment it produces is the sole reason why a bank’s loss is a hot topic of discussion to begin with.  Without the Fed, the FDIC, and the government’s nasty history of bailing out its top campaign contributors, JP Morgan would be just another bank beholden to market forces.  Instead it, along with most of Wall Street, has become, to use former Kansas City Fed President Thomas Hoenig’s label, a virtual “public utility.” Take away the implied safety net and “too big to fail” disappears.  It’s as simple that.

Moody's Downgrades 26 Italian Banks: Full Report

Just because it is never boring after hours:

  • MOODY'S DOWNGRADES ITALIAN BANKS; OUTLOOKS REMAIN NEGATIVE

EURUSD sliding... even more. But that's ok: at some point tomorrow Europe will close and all shall be fixed, only to break shortly thereafter. And now.... Margin Stanley's $10 billion collateral-call inducing 3 notch downgrade is on deck.

James Montier On "Complexity To Impress", Monkeys With Guns, And Why VaR Is Doomed

"One of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling. He points out that “Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands." - James Montier, May 6

Fitch Downgrades JPM To A+, Watch Negative

Update: now S&P is also one month behind Egan Jones: JPMorgan Chase & Co. Outlook to Negative From Stable by S&P. Only NRSRO in pristinely good standing is Moodys, and then the $2.1 billion margin call will be complete.

So it begins, even as it explains why the Dimon announcement was on Thursday - why to give the rating agencies the benefit of the Friday 5 o'clock bomb of course:

  • JPMorgan Cut by Fitch to A+/F1; L-T IDR on Watch Negative

What was the one notch collateral call again? And when is the Morgan Stanley 3 notch cut coming? Ah yes:

So... another $2.1 billion just got Corzined? Little by little, these are adding up.

Deutsche Bank Takes A Jab At JPM's "Fail Whale"

We have presented our opinion on the JPM prop trading desk repeatedly, in fact starting about a month ago. Last night, Senator Carl "Shitty Deal" Levin also decided to join the fray, which is to be expected: the man needs air time. And now, in a surprising twist, competing banks, all of whom have more than enough skeletons in their own prop desk trading closet, are starting to speak up against the bank that should not be named. Enter Deutsche Bank's Jim Reid and his take on the Fail Whale.

Guest Post: Does Jamie Dimon Even Know What Heging Risk Is?

Having listened to the conference call (I was roaring with laughter), Jamie Dimon sounded very defensive especially about one detail: that the CIO’s activities were solely in risk management, and that its bets were designed to hedge risk. Now, we all know very well that banks have been capable of turning “risk management” into a hugely risky business — that was the whole problem with the mid-00s securitisation bubble, which made a sport out of packaging up bad debt and spreading it around balance sheets via shadow banking intermediation, thus turning a small localised risk (of mortgage default) into a huge systemic risk (of a default cascade). But wait a minute? If you’re hedging risk then the bets you make will be cancelled against your existing balance sheetIn other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. That is how hedging risk works. If the loss on your hedges is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging riskYou are speculating.