JP Moron - How to lose 2 billion bucks on a single trade

Generali

http://online.wsj.com/article/SB10001424052702304070304577396511420792008.html

It's interesting (to me) that various hedge funds were complaining that JP Morgan were skewing or even fixing the market because they held such a huge position.

JP Morgan claim this was a hedge* that went wrong and not a 'prop trade' (i.e. a speculative bet on the future direction of an asset price). I have very serious doubts about that.









*A hedge is a form of insurance designed to stop you losing money in some circumstances. An example would be buying your holiday money when you book your holiday so you know that you'll be able to afford your spending money.

purch

It's ok.

The Billions they make manipulating all the other markets (especially Gold and S*****) will easily fill that hole :eek:

The_J

I can assure you the exposure is much more than $2bn (try multiplying that by 100) but the difference between the other French nutters is Bruno has not been making these trades without the consent of his superiors and in fact has been closely monitored.

This individual trader has a position bigger than all but 4 or 5 of the major finance houses.

michaels

Seems like an odd thing to do when you are in the middle of a battle with US regulators who are trying to legislate against Prop trading by 'to big to fail' banks....more to this than meets the eye?

Wookster

The sooner banks are prohibited from this sort of activity the better.

The fact that banks (including the more 'safe' ones like JP Morgan) still don't have a full grip on the trades & risks they are taking is extremely worrying.

It is time for banks to be made to be boring as they were 40 years ago. If this doesn't happen willingly, then legislation needs to be brought to bear.

purch

Probably time someone popped into JPMorganChase and explained the concept of a "Hedge".

Got any free time Gen ??

Preper

Did they not make a profit every single day last yr?

The_J

michaels wrote: »

Seems like an odd thing to do when you are in the middle of a battle with US regulators who are trying to legislate against Prop trading by 'to big to fail' banks....more to this than meets the eye?

Yep, that's why he's doing it (and being allowed to) in London.

The sums of money are beyond comprehension, we're talking about the GDP of Slovakia, Croatia and Bulgaria put together. From one man.

I appreciate the "legislate" comments but you have to understand, financial products are incredibly complicated, it's like there is a room full of passages and when you legislate you just shut one door. All of these markets are useful and can be used by companies to reduce risk.

The world has changed beyond belief from 40 years ago. You can't uninvent the internet or other technological advances so it's naive to take such a viewpoint. Our politicians, in fact all politicians, aren't even nearly clever enough to understand the financial markets, most of the City aren't clever enough to understand it.

Boom and bust is a fact of life, it's the human condition. We have to live with it.

edit: To confirm JPMC are not "safe" (thanks for the lols) and I can assure you they are fully aware of the risks.

Generali

The_J wrote: »

I can assure you the exposure is much more than $2bn (try multiplying that by 100) but the difference between the other French nutters is Bruno has not been making these trades without the consent of his superiors and in fact has been closely monitored.

This individual trader has a position bigger than all but 4 or 5 of the major finance houses.

The loss is $2,000,000,000 (so far) rather than the exposure.

The trade was detailed some time back by Bloomberg who did some excellent investigative work:

http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-is-said-to-distort-credit-indexes.html

It's hard to explain in simple terms what was going on but I'll give it a shot.

There is an index made up of various CDSs (a CDS is a derivative that provides 'insurance' against default). In theory, a derivative based on the index should have the same price* as the total prices of the underlying CDSs added together*, however it is claimed that JP Morgan held/holds such a massive position in this index that the price of the derivative based on the index is higher than the prices of the CDSs added together*.

In other words you could make money by selling the derivative of the index and buying the CDSs that make it up.

The value of the derivative has dropped and JP Morgan has lost big on it.

JP Morgan claim that the derivative position was a hedge against other positions, presumably loans made to US Companies. I doubt this to be the entire truth although I have no inside knowledge, it is merely my opinion.

Generali

purch wrote: »

Probably time someone popped into JPMorganChase and explained the concept of a "Hedge".

Got any free time Gen ??

The trouble is that Investment Banks are so blood y complicated these days that these things are going to happen. I know a bloke that came up with a very complicated trade. It seemed like a great idea until his boss worked out that the up side could be $10,000 and the downside could be $25,000,000!!!

A year after Lehmans went bust they still had unconfirmed trades. Legally speaking, trades should be confirmed within 1 working day of being struck.

Generali

The_J wrote: »

JPM can manipulate the price of anything.

I'm not sure this is entirely true. There are a lot of markets that are so liquid that any systematic attempt to manipulate them would be bound to fail. There are at least 10 FX currency pairings alone that you couldn't manipulate realistically except for a matter of minutes (USD, GBP, EUR, JPY, CHF). To that you can add most US, UK, German and Japanese Government Bonds; most decent sized stock market indices; and others besides.