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Business Insider, And Now JP Morgan’s $2 Billion Trading Loss Is Already $3 Billion (And Counting), here. Ok so the reported losses are growing.
Jamie Dimon said it could get worse… and it is.
The JP Morgan trading loss that was $2 billion four days ago is now $3 billion, report Nelson Schwartz and Jessica Silver-Greenberg in the New York Times.
Why?
Because every hedge fund in the world knows JP Morgan is stuck in a position so big that it can’t unwind it… and they’re betting against it.
Zerohedge, Jamie Dimon “Invited” To Testify Before Senate, here. And there will be compelling TV on its way.
Update: JPMORGAN SAYS DIMON TO AGREE TO TESTIFY TO SENATE. Ummmm, there was an option?
As everyone (or at least Zero Hedge) long expected, JPM’s prop trading debacle just got political and senators are about to demonstrate to the world just how little they understand about modern IG9-tranche pair trades. Expect to hear much more about JPM’s “shitty” prop deal.
Zerohedge, So How Are JPM’s Prop “Counterparties” Faring? here. But Bluecrest and Blue Mountain are not reporting like they are Party B. There are reports that Boaz Weinstein/Saba is Party B but no actual P&L numbers being whispered. Odd?
Now one thing we know is that when it comes to reporting one’s results to an aggregator: when you have a profit you never under-represent it. And in this special case, since the funds are likely eager to recruit more like-minded hedge funds to their side of the trade, the best way to do it is by showing profits.
Which, for the early part of May, when the bulk of the JPM losses took place, are oddly missing for the two biggest players across from JPM…
So: where are the profits really going?
Lisa Pollack, Alphaville, Recap and tranche primer, here; and The high yield tranche piece, here. Pollack going to get the book deal for the London Whale, clearly. Once she nails down the positions maybe we will get to the Gaussian Copula substory. Chances seem to be improving that this story is about a bunch of smart guys who tried to resurrect a dead quant model. Maybe it would be better to recast the story as a Zombie Quant model or go with the J Depp/Dark Shadows/Vampire Quant model. But even though this story has massive potential to connect with loads of people, Pollack is not locating Party B P&L nor has anyone else. It’s a problem if you cannot get that puzzle piece. Plus there is way more premeditation here than just Keystone Cops stuff started to happen on 6 Apr. Maybe there is some offshore vehicle hole getting filled up whose reference entity name cannot be spoken? That would change the story’s complexion, right? Maybe the London Whale is a red herring?
Coverage of the
$2bn$3bn loss emanating from JPMorgan’s Chief Investment Office on its synthetic credit portfolio continues a pace, and FT Alphaville’s tour continues too.The desire to understand what the trade was and the rationale behind it continues to bug us and many others. Interestingly, some of the discussion of late has come full circle. Bloomberg kicked off the London Whale saga on April 6th, and their follow-up on April 9th contained a detail that has now come back into the narrative. This time, though, it’s more than a mere sidenote — more on this in a minute.
While these more recent explanations are satisfying, we’re still scratching our heads a bit.
The challenge remains: to find trades that have managed to deteriorate with the speed that CEO Jamie Dimon has claimed they have — small in the first quarter, $2bn “all in the second quarter”, and “it kind of grew as the quarter went on”.
Now, credit tranches, which are leveraged positions on credit indices that themselves already involve a lot of leverage, could do this if the model used to determine hedge ratios wasn’t up to the task or if the trades were just outright foolish.
Al Pacino, Any Given Sunday, here; or Clint Eastwood, here. Now we are going to have to endure a seemingly endless stream of Taleb’s gloating i-have-been-warning-you-about-VaR-for-years interviews; the FinQuant equivalent of the Icky Shuffle. Look Team Firm Risk, you all have seen It’s a Wonderful Life, right? Well every time a bank gets their bell rung, Taleb gets another Fox and Friends interview.
Naked Capitalism, JP Morgan Loss Bomb Confirms That It’s Time to Kill VaR, here.
One of the amusing bits of the hastily arranged JP Morgan conference call on its $2 billion and growing “hedge” losses and related first quarter earning release was the way the heretofore loud and proud bank was revealed to have feet of clay on the risk management front. Jamie Dimon said that the bank had determined that its value at risk model was “inadequate” and it would be using an older model. And no wonder. The Financial Times report contained this bombshell:
JPMorgan also restated its “value at risk”, a measure of maximum possible daily losses, of the CIO [the unit that executed the trading strategy that blew up] in the first quarter from $67m to $129m.
Lisa Pollack, ft.com/alphaville, Too Big To Hedge, here; and What Position Transparency, here.
“Synthetic credit portfolio”. That’s the book where the $2bn in mark-to-market losses took place for JP Morgan, according to an announcement made on Thursday. A result which has now cost them a their AA- rating from Fitch and landed them on negative outlook with S&P, as announced late on Friday.
FT Alphaville has analysed the credit trades that might be in that portfolio, in an attempt to reason through what may have gone on. The fact, however, remains that we know precious little. Why is that? Is this acceptable that after the financial crisis that this can happen to a bank, let alone a systemically important one like JP Morgan?
Got a buck that says you cannot find a Firm Risk person on 13 May 2012 who knows substantially more about the positions than Lisa Pollack.
Zerohedge, Double or Nothing: How Wall Street is Destroying Itself, here.
This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which I think is probably what makes these kinds of practices so attractive to the arbitrageurs of Wall Street (and of course Wall Street often selects for this by recruiting and promoting the most wild-eyed and risk-hungry). Martingale works by betting, and then doubling your bet until you win. This — in theory, and given enough capital — delivers a profit of your initial stake every time. Historically, the problem has been that bettors run out of capital eventually, simply because they don’t have an infinite stock (of course, thanks to Ben Bernanke, that is no longer a problem). The key feature of this system— and the attribute which many institutions have copied — is that it delivers frequent small-to-moderate profits, and occasional huge losses (when the bettor runs out of money).
Milken in WSJ: Why Capital Structure Matters
Salmon: Do CDSs cause more bankruptcies?
Bookstaber: Faster isn’t always better. Funny argument against a strawman no one actually believes in. Think of the quest for higher performance like washing. While everyone agrees that compulsive washing, ala Lady Macbeth, is of limited general benefit, the observation hardly merits use of the electrons needed to blog it i.e. “dude, did you hear, washing is not always better”. Its sort of too Billy Madison to be offered without some obvious ironic distance. The operative issue is how to identify code that should be kept competitively fast as well as those programs that figuratively haven’t bathed in an extraordinarily long time. I suppose you could also throw in code that is odiferous/stinky from inception or by design. Perhaps APL interpreted code is concise and gets along well with some of the rocket scientists but it hasn’t seen a bar of soap since Alan Perlis roamed the lecture halls in New Haven. Today it is not unheard of to find executives getting used to the nutty fragrance of essentially free-of-charge high performance Java code running in their production infrastructure. I have come to expect better insights from Bookstaber – I’m looking for a blog post clarification of his position – “In the age of Moore’s Law, slower is harmful, almost everywhere”.
Alavian et.al., 2008 Counterparty Valaution Adjustment.
Eric Rosenfeld LTCM: talk at MIT. Head of Fixed Income Trading at Salomon back in the day.
Accounting: Satam Issue confronting PwC.
Salmon’s Bond Dealer talk about Bistro
1458 Cotrugli’s one chapter on Double Entry Bookkeeping Delia Mercatura et del Mercante Perfetto
1494 Pacioli’s 36 chapters on Double Entry Bookkeeping De Computis et Scripturis
1953 First GAAP Codification
1973 FASB Formed; IASB ;
2001 Enron/Arthur Andersen; FAS 133 accounting for derivatives;
2002 Tyco/ PWC; SOX
2007 Satyam wins Golden Peacock Award for Corporate Governance;
