JPMorgan Chase & Co | Oops, I did it again.

[Typhoon]

Reuters | JPMorgan has $2 billion trading loss, reputation hit

(Reuters) - JPMorgan Chase & Co said on Thursday that it suffered a $2 billion trading loss from a failed hedging strategy, a disclosure that hit financial stocks and the reputation of the bank and its prominent CEO, Jamie Dimon.

Since the end of March, the company's Chief Investment Office "has had significant mark-to-market losses in its synthetic credit portfolio," the company said in a quarterly filing with the Securities and Exchange Commission.

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[AzariLoveIran]

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what is the "raison d'être" of JPM ? ?

why does FED lend to JPM with Zero interest rate ? ?

is JPM a betting office .. a gambling pit ? ?

these institution get free money from FED (representing America) to invest in businesses and ventures that create wealth, new drugs or new technology or crop

America thinks these people, JPM, GS, MS etc, can find and finance the right businesses to generate wealth for America

instead

JPM and others, are in betting business .. excuse is risk management and generating liquidity

rubbish

well

that is why US new business formation dropping steadily


.

[Typhoon]

A perceptive rant from another board with credit to anonymous author: chindit13

A Letter to Caruso and Cabrera at CNBC.

Fri, May 11, 2012 - 09:48 PM

Owing to either a ripple in the space time continuum, or solar flare activity that affected satellite transmission, I was graced in my part of the world by a broadcast from CNBC (usually not available in my area). I witnessed the on-air "talent" discussing the JPM fiasco, and berating guests who did not toe the corporate line of granting a kind of Papal Infallibility to the banker set.

I was prompted to pen this missive to one Michelle Caruso Cabrera, whose assets are less than a post 2008 Icelandic Bank, but what assets she has are paraded unabashedly and shamelessly before the wide angle lens brought too close to its subjects, seemingly distorting the view.

Here it is:

MCC, you are an durian. An absolute, complete, udder (joke intended) buffoon. You have no concept of what banking is all about, nor any idea of what the JPM “hedge” was. If you cannot speak intelligently about the IG9 10 year Synthetic CDX index and what JPM was attempting to do with it---which you clearly cannot---then you should keep your pie hole stapled shut. In addition, it was clear from your comments Friday that you have no idea what hedging risk means, and you are of the delusion that all risk is of the same type. Please be informed that the kind of hedge that two sides of a trade can do in, for example, corn (farmers vs. cereal makers) is completely different from the nature of risk financial companies attempt to do. The ignorantly arrogant drivel you put toward your one rational guest Friday reminded what few viewers your network has left that the “talent” was not hired for their intellect or insight. In your particular case, one is hard pressed to determine what the network had, or has in mind by employing you. There are a lot of boobs in the world (and I use that term both literally and euphemistically).

Some risks cannot be hedge. These risks are merely passed around like an Old Maid until they land in the lap of the dumbest, most arrogant, or most well connected institution. Think AIG. For a completely different insight---and to better understand what your guest was attempting to say in the face of your ignorant arrogance---think insurance company. They charge premium rates that factor in the assumption of a certain number of payouts. Old time responsible banks, before the obfuscation of prop trading in deposit-taking institutions---used to both know their borrowers and charge loan rates that factored in a certain amount of loans gone bad. That is also why banks hold loan loss reserves, you moron.

If “globalization” means that our major banks lose out to banks who would make more aggressive lending or financial promises, so be it. Wouldn’t we all have been better off if it had been HSBC or Swiss Re that had Joe Casano’s group in its employ? Yes, some hedging needs have changed since the days of James Stillman of Citibank, but only some. Don't cut JPM so much slack.

Part of the unlearned legacy from the financial crisis is that not all risk can be hedged. The risk doesn’t go away, it merely gets shifted, obfuscated and convoluted....until it bites the biggest fool, which unfortunately has turned out to be the US taxpayer. Do you actually believe the entire financial system can be hedged against the risk inherent in synthetic CDO Squareds based upon a collection of hand-picked subprime mortgages?

If you have the ability to do simple math, and be realistic at the same time---and not an ignorant, knee-jerk mouthpiece for your betters in the finance industry---consider this:

JPM holds $1.1 trillion of customer deposits, which represents about 9% of the total US banking system deposit base. They have about $720 billion in loans outstanding (which raises another point about the need---or lack thereof---for more QE, as the system is hardly hobbled for lack of liquidity). The $400 billion difference is used for prop trading, even if the euphemism used by JPM’s bean counters is “cash management”.

Getting back to the IG9 Index which JPM’s whales (Bruno Iksil and Achilles Macris in London) traded, this was more prop trading than hedge, and the degree which these two tried to monopolize that synthetic index reeks of desperation trying to double down on a trade gone bad. Think Nick Leeson and not Nebraska corn farmer.

Now for the kicker. Try to get your addled brain around this: JPM has $60 trillion of derivatives outstanding. That’s $60,000,000,000,000, which is approximately the GDP of the planet Earth in one year. Now don’t go saying “that’s gross notional, not net notional!”, because the gross notional on the IG9 position was only $200 billion. In other words, given the at least $2 billion loss---and it may end up twice that---then JPM is looking at a 1% loss on the gross notional amount of what was supposedly a hedge. That should scare the bejesus out of any sane and intelligent person, which means you may well remain unaffected.

Iksil and Macris were considered JPM’s top risk traders. Cutting JPM some slack, what if the firm’s other traders are at least equally “skilled” at running risk and can be expected to perform “as well“ as Iksil and Macris? What’s a 1% loss on gross notional value of a $60 trillion derivative book? Do you think JPM has that kind of money?

Are you such a butt-licking sycophant of the financial industry that you think it is prudent for the custodian of 9% of the US deposit base to assume risk positions equal to the GDP of the planet? Can you not see that those who fail to be punished by history are condemned to repeat it, though not necessarily pay for it?

[Mr. Perfect]

Well there seems to be this notion that the gubmint has a magic stone to look at that can tell you which trades are going to lose money and which ones do not, which is of course chock full of dumb@$$. Problem being I'm reading that the Fed knew about this particular trade and did nothing about it. The Obama Fed had no problem with the trade.

So what are we talking about here?

[Dioscuri]

So what are we talking about here?

Evidently, about statements regarding the future that will correspond to existing situations, and statements that will not.

[Typhoon]

More on derivatives from chindit13

The Term "Derivatives" Hides a Multitude of Sins
chindit13 - Sat, May 12, 2012 - 01:09 AM

There are derivatives and there are derivatives. Not all are created equal. The industry tries to obfuscate by championing such verbiage as "net notional", suggesting that in the end there is no actual risk, or at least not risk anywhere near commensurate with the size of gross notional.

To a limited extent that is correct, and to a limited extent derivatives---and hedging---have some value.

There are, however, derivatives that serve no purpose except speculation---not even liquidity enhancement, but just out and out speculation---and in many instances there is no way to hedge a mistake already made. Investment banks tend to dress up this type of derivative in a Rube Goldberg-type infrastructure so as to fool, traditionally and most notably, Bavarian Landesbanks. This type of derivative also tends to be opaque both to market players not involved in the transaction and to the authorities who ostensibly regulate the industry. This hurts everybody from analysts to investors to taxpayers, since nobody can see the full extent of any firm's exposure.

Consider two types of trades:

1) A corn farmer knows his input costs and can estimate his yield. He sees current corn price and knows he makes a profit if he can sell here. General Mills needs corn for their breakfast cereal, and they know all of their costs of production and marketing, and have a good idea how many boxes they will sell. They know that if they can buy corn at current futures price, they make money. These two parties---farmer and General Mills---get linked via a corn futures contract. Everyone can see the price, the exchange insures compliance by both parties, and everybody is happy. Both sides are hedged.

2) A basket of subprime mortgages are packaged into an MBS, which is then sliced and diced into rates and durations, repackaged into a number of CDOs, which are further sliced and diced to create a CDO of CDOs. After that CDO Squared is formed, a party such as Goldman, seeing that some bewildered and grossly overmatched client seeks a certain yield, creates a security that merely mimics the behavior of an existing CDO. Goldman might even work with a fund who wants opposite exposure, and allows this other client to hand pick the subprime mortgages that will go into what eventually becomes a synthetic CDO with a CDS kicker (which is cynically marketed as a yield enhancer to the fool tricked into writing it).

Of this latter "derivative", there is no hedge. The risk inherent in the subprime mortgages is there until it destructs, and whomever is holding it when the music stops loses. Once the credit that should never have been created is created, it is just a matter of passing it around until the Last Fool assumes it. The ugliness of the 2008 debacle was that IBs somehow convinced (read: paid off) the ratings agencies to grant AAA status to a collection of equally bad mortgages. These were doomed to failure by birth, but nobody cared because the securitization market afforded them the means to pass the buck.

Derivatives have now become so complex, so convoluted, and so inscrutable that hedging exposure---and I mean market exposure, not counterparty exposure (which is another issue entirely)---is an art in its infancy. A math geek can toss in all the symbols the Greek language has on offer, even spread a thin coating of Green's Theorem over the top, but that does not guarantee that the hedging formula he creates works. There is tail risk as well as non-static correlations involved.

This is where, it seems, JPM's London Whales went wrong. They were working off a formula that was wrong, and this error could only be known in retrospect.

As I wrote in my Michelle Caruso-Cabrera "Fan Letter", this supposed "hedge" was really prop trading off the bank's excess cash position. They have this excess cash because Bernanke continues to push on a string, and mostly what banks do with all this overflow is make new derivative bets whose behavior their formulas may not accurately predict. In a yield-starved world there are a plethora of desperate suckers as well as those possessed of excess hubris, so the gross notional amount of derivatives continues to rise. That is what led to a 1% loss in the gross notional value of the JPM IG9 position. Note well: 1% loss in the gross notional value.

How much of the current $700 trillion of gross notional outstanding derivatives are of this type is uncertain, because the entire system---save for a few exchanges and entities trying to track it---is opaque. We simply do not know.

We do get hints into the extent of it, however, when events such as JPM's blow-up take place.

We cannot afford to be in the dark.

[Simple Minded]

Typhoon please extend my mucho thanks to chindit13.

I have seen the number of $700 trillion of derivatives floated elsewhere. As someone wrote you can't buy a tube of toothpaste with them, but......

When those babies start going belly up, it will be interesting......