Hi guys, didn't see a thread in here re the recent JPM loss in the CIO department. I work in the energy trading industry hedging power/gas positions and Risk Control would instantly be all over a much smaller position. I know several posters work in finance and I'm curious as to the following points:

- The positions taken were supposedly a hedge gone awry. If this was in fact a hedge shouldn't JPM see a rise in the book/position value that was supposedly being hedged?

- Is the position a hedge at all or clever spin by JPM/Dimon?

- How do risk deparments and/or smart people close to the trading team responsible miss exposures/trading losses like this?

Any other points/thoughts appreciated - always interesting to hear more about corporate finance.

degens with pals in Washington to bail them out

- Yes they noticed and most likely tried to adjust accordingly. The CIO is a proprietary trading desk. They on average only hedge extreme tail risk.

- Don't know, depends on the instrument.

- Models (like CAMP, VaR etc.) wok on several assumptions. Like: Instruments are liquid at all times, distribution is normal like, cross-instrument hedge will hold out in extreme, borrowing rate is risk free, rate of systematic risk can be calculated at all time and hedged accordingly, risk is shown through previous volatility etc. A break in an assumption will not be shown in a model or will be undersized in risk analysis.

You'd think. The lying tends to get a little thick when there are losses and the blame needs to be assigned to nebulous market forces rather than people.
Spin. It was an outright speculative position. The position in question was a bet that the cost of insuring a wide range of bonds against default would drop. They were short default insurance.

So let's assume for sake of argument it WAS a hedge. What would it hedge? What loses you money in the event that the risk of bond default drops? The answer is a short bond position in non-AAA bonds(or derivative equivalent thereof). Based on the size of JPM's trading loss, this hypothetical short would have to be 10s if not hundreds of billions in size (depending on how non-AAA the bonds were). There's no evidence JPM held such a position, and it's highly unlikely they hold (or held) it in secret - investment banks are generally net long the bond market, not 11 digits net short.

To put it in normal people terms, JPM is claiming they have a negative insurance policy on their negative house (which no one can find), so that if the house spontaneously sprouted a new wing they won't have to pay for it. Suffice to say their claim fails the sniff test.

When the supposed risk hedging office is doing your big time proprietary trading, who's left paying attention? There's no one watching the watchmen.

2 billion isn't really a big loss compared to the size of their balance sheet. I mean just their repo desk is something like a 50 billion dollar book (in fact, it might even be like 90B now), but those are overnight short-term trades.

If anything Dimon is known to be one of the most hawkish CEOs when going over the monthly numbers, his meetings are known to be very long and very detailed from each of his department heads. From what I read this happened in the London book, right? Remember, they have North America, a bit in Canada, EMEA (Europe, Middle East, Asia). It could have been easily overlooked, as there is someone in charge of each area and all report to Dimon monthly.

As stated before, assumptions are made, models can be wrong, or it could have been simply overlooked. If the last few years have taught us anything, it's that some assumptions in our financial models aren't exactly static. Usually something like that happens when a "hedge position" goes south. If it was a true hedge, there wouldn't be a loss, would there?

I also work for a large energy company in the commodities trading group, and the comparison between something like an energy company's book and behemoth like JPM isn't really comparable. We're talking the difference between hundreds of millions and a lot of billions. Our trades/positions are pretty easy to keep an eye on, with each group having a risk tolerance. I'm leaning towards this not being a straight speculative trade from the guy at JP though.

well the fbi is now on the case so all the banks will be on their toes for awhile.
the public is a little suspect of any banks that get a guarantee of funds that speculates with their money at risk

The whole thing just sounds weird. Why the FBI instead of the SEC? Why so quickly? Is there an air of criminality about this? That would be what the FBI involvement is implying.

It's a strange line that gets crossed. Did someone with authority go above their risk limits and take a really bad position or did something illegal happen?

I know there's a lot of hate towards banks and bankers right now, but that's the way it works. When things are going great, not a word is said, when there are losses all hell breaks loose. In reality, people will take positions to take advantage of market conditions. Sometimes these things don't work out, which is really on the only time we hear of it.

Go look at the energy companies in the last 4 years and see how their natural gas bets went. Look at Mid American and Constellation specifically. Did the FBI/SEC get involved?

FBI is just dumbfounded how a government funded, politically connected, and legalized group of thieves could possibly have lost money.

Might want to look at the correctness of that statement. JPM wasn't actually ever in need of the government's money (directly) and I swear I remember the Fed personally asking Dimon to help with the Bear Stearns deal, but unsure if they approached him about the wamu deal.

I know saying some cliche insulting statements can be fun sometimes, but they should be used when actually appropiate.

Of all the banks, JPM was the one best situated to deal with the crisis and a 2b loss in terms of the bloodbath of what happened 4 years ago is literally laughable. A 2b trading loss in a quarter where a company still made quite a profit and has a 134b market cap is being blown way out of proportion. In light of the current environment in regulatory, political and public opinion, the overreaction is obvious.

it also has to do with using them to control smaller banks. if they can do things that could jeopardize the publics money smaller banks will follow. those wont be in a position to work themselves out of problems and the public gets stuck again.

I love the attitude -- "JP Morgan can handle a $2 billion loss, so nothing to see here, move along."

It's not the sheer magnitude that has people up in arms, although it is likely to be more than $2 billion because of the difficulty of exiting such a large position. The real issue is whether it was a blatant violation of the Volcker rule (or whether the Volcker rule's distinction between impermissible proprietary trading and permissible hedging is too muddy to be of any use).

funny how FBI thinks it has any knowledge about financial hedge...JP's gonna own them

Too big to fail became way too big to fail. The banks got bigger, not smaller.

You have to look at things in the correct perspective. A two billion dollar loss at a 140 billion dollar bank isn't nearly as bad as a 2 billion dollar loss at a 20 billion dollar bank, agreed? I'm not saying it wasn't a big deal, but it wasn't nearly as bad as people are making it out to be.

A % risk is the same whether it's 1 dollar or 500 billion dollars. The key here is that "two billion" sounds like a hell of a lot of money to the public. In relative terms it's not the same at all.

Did someone gain the now $3billion dollar loss? Is it zero sum?

It did not violate the Volcker Rule because it's not a law yet.