Whale Sashimi

JPM’s notorious “whale,” Bruno Iksil, blew up, costing the bank $2 billion. Not to worry, the taxpayers will take care of it. Obviously the Volcker rule against bank speculation is a total failure as the jerks have figured out how to bypass it. They’re back at it.

Bloomberg News reported in April that a single JPMorgan trader in London, known in the bond market as “the London whale,” was making such large trades that he was moving prices in the $10 trillion market.

Mr Iksil has been trading huge positions in the credit markets, so large that other participants have publicly complained that they are too large for the market. JPM publicly defended this as normal course of business. Now, of course, the inevitable has happened but bank management cannot claim the usual “rogue trader” excuse when there has been so much publicity about his trading.

JPMorgan is trying to unload the portfolio in question in a “responsible” manner, Dimon said, to minimize the cost to its shareholders. Analysts said more losses were possible depending on market conditions.

Right. Now they are squarely in everyone’s sights. Apparently Mr Iskil was doing basis trades in the hundreds of billions. Basis trades are arbitrage trades, in this case the difference between CDS and cash bond spreads.

Bruno Iksil, the London Whale, had a massive long position on corporate CDS in general, and the CDX.NA.IG.9 index in particular. He was selling protection, betting that credit spreads would go down, rather than up. The position was meant to be a hedge, although it’s a bit unclear how JP Morgan could have some massive short position in corporate debt that it was hedging against. In any case, CDS spreads went up — and credit spreads, in the cash market, didn’t.

Cue a $2 billion loss.

Rarely has a position been as widely publicized as Iksil’s, and I wouldn’t be at all surprised to learn that the credits with the highest basis were precisely the credits CDX.NA.IG.9 index. Whenever a trader has a large and known position, the market is almost certain to move violently against that trader — and that seems to be exactly what happened here.

A bit unclear? This was no hedge, this was a highly leveraged speculative bet. Banks are long credit risk by definition, it is what they do.

The whole chain of command should be fired. But they are a protected species, so they’ll send the bill to the taxpayers and high five their way to the club. Elect Ron Paul President, it is our only chance. These jerks and their tame politicians will destroy the financial system.

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  • Tyro  On May 11, 2012 at 11:53 am

    We don’t hunt whales remember? We pretend to be angry at Japan for doing so…

    A hedge against corporate debt eh? If you’re pumping the market can you take out a CDS against yourself to offset money spent doing so?

  • reality  On May 11, 2012 at 1:02 pm

    Well the CDS will typically decline in value if your stock goes up (presumably you are more credit-worthy) so you want to sell CDS on your bonds. Just to make it more interesting, if the price of your bonds should move the other way, you can take the decline into earnings as you can presumably buy back your debt for less than previous value.

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