a few hf/prop desks at other banks that took the other side of the trade prob gained

i found this link helpful
http://www.zerohedge.com/news/irony-...edge-22-tweets

wow, don't know how I miss this. thanks

everything is nicely explained...

it was me

This has to be mostly Greek bonds, right? Considering how cozy the relationship was/is between MFGlobal and JPM, and how deep MFG was in Greek bonds, it's seems like a no-brainer that JPM was also backing Greek bonds. As the haircut on the Greek bonds seems likely to get bigger and bigger, wouldn't it be expected that this $2B loss gets bigger and bigger?

Who are the investors who actually lost this $2B? Are they the ones who coerced the committee to have this hearing? Or is this just a dog and pony show that JPM is using for protection from their clients?

that's what i don't get. Somewhere, there are investors who have a $2B gain, so why is any of this news? JPM has never insisted the money 'vaporized', ala MFGlobal, so why is it a bad thing when the markets work against a Wall Street institution like JPM? Are the big guys always supposed to win?

OR, is there speculation that JPM purposely manufactured this loss for the benefit of themselves or other clients?

They do, and it was. The rules on CDS accounting mean that CDS's are accounted on a mark-to-market basis instead of accrual, so when the market value of your CDS goes down, you have to report a big quarterly loss, whereas if the value of the underlying bonds you're holding has gone up, you don't report the gain until you realize it.

The SEC is investigating. My guess it that there are some bored agents at the New York FBI, and it's politically convenient to 'investigate' even if the FBI ends up not really having jurisdiction or there wasn't actually a crime committed or law broken.

For anyone interested who isn't up to date on derivative tech, an ex-Goldman employee wrote a fairly plain-English explanation of what happened here:
http://dealbreaker.com/2012/05/the-t...ale-of-a-fail/

It has nothing to do with that. If they were a hedge fund no one would care very much over a bad $3B trade.

But they are a bank with federally insured deposits. You take the fed's insurance, then you are doing business with the feds and thus the taxpayers. If you don't like that, don't be an FDIC insured institution.

JPM could split into 2 companies (one bank, one hedge fund) if that is what they want, but as long as they want to combine boring banking and high tech trading, then they will get more scrutiny.

I have no opinion on whether or not JPM did anything "wrong" here as I don't at this time understand what they did. But if the SEC or FBI is concerned, they should definitely investigate.

This explanation fails to grasp the nature of the situation, The CDS index position was a market long (ie. it increased in value when the default risk (and thus yields) fell and bond prices rose).

The bond position it was supposedly hedging (which almost certainly doesn't exist) would therefore have to be a short.

The situation would have been very different if JPM was buying insurance as you imply instead of selling it.

Corporate bonds (the position the Whale was hedging) aren't FDIC insured. Try again.

They were buying one position AND selling another to offset the cost of buying insurance. It was a complicated trade, clearly.

A reasonable position. Although it should be noted that stupid bond shenanigans in a large hedge fund can cause systemic havoc too.

--The Ghost of LTCM

There was no other opposite position though. Show me the $70M short spot bond position and we'll talk.

Read the link I posted earlier.

You have no idea what you are talking about. At all.

They had a very long position in CDS of HY firms and the HY index [and assorted tranches]. This position was profitable last year and made them ~$500m in 2011. {Notice how the p/l always looks worse if you discount all the profits on a trade}

They then decided to hedge [for some reason] their protective position in the CDX.NA.HY by selling protection in the IG.9 index. The rationale [seemingly] being that if overall corp credit got worse, they would make more on HY continuing to file BK as when they won on Kodak and AA and Dynegy.
And if junk credits improved, and the value of their CDS fell, that would be mitigated by gains on the IG.9, after all, it's fairly unlikely for junk bonds to rally while I-grade falls.

It's the only thing that makes sense of the facts, AND fits with their previous commentary on their portfolio in London. It was not a bullish bet on the markets. If that was their view, they wouldn't have needed to buy all that protection on the HY series.

Of course, none of this is to excuse either the oversized loss, poor risk modeling, foolish sizing, messing with VaR inputs, possibly hiding of bad news from upper mgmt in london, or cavalier response by CEO to earlier questions last month. And they didn't consider their lack of options when it came time to rebalance their hedges [as noted in the FT] which may have been the real problem that caused the losses - [at some point you have to roll these trades or you get both tenor and single-name mismatches as certain names fall out of the Index.]

But it was not 'prop trading.' Their $360Bn asset/liability mismatch on the loan book has to be hedged synthetically somehow - the IR, the convexity, the basis risks, et al.

Otherwise, OMG!!! Dimon is long & super-levered credit-risk and macro-risk hed asplode call the NYT he's...he's...spec-u-lating with gubmint mobnies! Or something.

Esp given that both Dimon & CFO categorically and publicly stated otherwise, [and I'm fairly certain lying about this stuff is punishable by jail time even before D-F or Volcker rules go into effect.]

The goal is always to hedge your risks with the cheapest, effective insurance possible. JPM got it badly wrong, but that doesn't make it 'prop.' The odds that Drew and Iksil were doing a 1-way directional bet are probably < 1%.

Finally, given that 99% of all CDS/Index trades are reported to DTC-C, regulators could have seen what was going on any time they wished, esp since everyone knew that Iksil - The Whale - was the one moving the markets.

That's one reason the idiot politicos are making so much noise over this - they already *HAD* all the info they needed about what JPM was doing, but, just like Madoff, failed to provide any actual oversight.

Fire up the 'ol excusatron - are they paying you by the word? Because if it's by the rational though, you shouldn't get a cent.

If this was an actual hedge, they'd have a 2B paper profit to match the 2B loss and JPM could just tell everyone that. It's really quite simple: there is no profit - hence no opposing position. It's all smoke and mirrors. If a nominal hedge is "foolishly sized" in your charming words, it's not a hedge at all.

And guys hedging off risk don't go around cultivating an image as "the Whale". Even a guy like you should be able to figure that one out. Just saying