Will The London Whale Bring Down JP Morgan?

Monday, May 14, 2012

New York bureau chief and Wall Street correspondent for Marketplace Heidi Moore talks about the huge loss announced by JP Morgan last week, and what it means for the company, regulation and our economy.

Comments [56]


i'm sorry...

May. 15 2012 09:04 AM
Giuseppe from NYC

According to
JPM's losses arose from positions in CDX.NA.IG.9. This is an
index of credit default swaps (CDS), which gives protection
("insurance") against defaults of North American investment
grade corporate bonds:

To answer Chris' question, they did sell protection (were on
the hook if defaults occurred), but simultaneously bought it
for a shorter term, resulting in a net exposure for a shorter
period ("calendar spreads").

Now, the CDX is a typical hedging instrument and nearly
always the vehicle for an imperfect hedge. Yes you could
interpret that selling of protection in isolation as a bet that
bond risk would decline. But there is nothing inherent in this
that says this position was not meant to offset other risks in
that portfolio.

I go out on a limb to guess that the biggest mistake may have
been neglecting leverage and even more so liquidity. Heidi
Moore hinted at the former, the fact that a small movement in
the relevant risks may cause huge losses because of the size of
the position (estimated as high as $100bn notional). The other
problem is that even if the CDX is relatively liquid (and
that's one of the reasons it is used as a hedge) when amassed
in such "whale" proportions it's very hard to disinvest from.

Imho, regulators should consider risks such as these arising
from the choice, and monitoring of hedges.

May. 14 2012 07:43 PM
Giuseppe from NYC

While I agree with Heidi Moore that this huge loss is
symptomatic of lingering systemic risk and must be investigated
and preemptively addressed by regulators, I believe some of her
conclusions were rush.

Specifically, I don't see how one can conclude from the size of
the loss that this was the result of speculation as opposed to
hedging. So called "perfect hedges" (those for which for every
$1 down in the risky asset the hedging asset moves $1 up and
viceversa) are most often either infeasible or make no economic
sense (an example would be to buy 1 share of JPM and
simultaneously sell another short, guaranteed not to lose nor
to profit).

Instead, most traders, portfolio and risk managers chose close
proxies and take positions in those in proportion to so called
"hedge ratios." The insurance example is a bit misleading,
since first of all these hedging derivatives are bilateral,
secondly, they tend to be more liquid when standardized. But
let me try to make up an example. Suppose I am a developer who
owns 10 houses in 10 different towns. For some reason buying
individual insurance on each is either impossible or too
costly. Instead I find an insurer willing to sell insurance on
a model house for that region. Through some complicated math I
determine that if I buy 10 such contracts covering the average
price of my houses I will not lose more than $100,000 95% of
the time (this is the "value at risk" of the hedged portfolio)
and this is acceptable for me.

Now, unforseen events occur and my "house portfolio" turns out
to be a lot riskier, say the 2 costliest houses burn down
within a month and only one accident can be covered under the
terms of those contracts, so my losses end up $300,000.

This was a hedging blunder and it is not unreasonable that
something like this may have happened at JPM.

May. 14 2012 07:40 PM
Eugenia Renskoff from Brooklyn,NY

Yes, as someone here posted, why aren't these executives fired? It is awful to know that after all this time there is no accountability, that they can do what they want and get away with it.Eugenia Renskoff

May. 14 2012 04:24 PM
David Sampson from Missori

How do big money stel and get away with it Politics

May. 14 2012 01:55 PM

Note from the copywriter for the graphs I linked to with some information for those who would like to bank somewhere other than the Too Big To Fail banks:

"9 Biggest Banks' Derivative Exposure - $228.72 Trillion
Note the little man standing in front of white house. The little worm next to lastfootball field is a truck with $2 billion dollars.
There is no government in the world that has this kind of money. This is roughly 3 times the entire world economy. The unregulated market presents a massive financial risk. The corruption and immorality of the banks makes the situation worse.

If you don't want to bank with these banks, but want to have access to free ATM's anywhere-- most Credit Unions in USA are in the CO-OP ATM network, where all ATM's are free to any COOP CU member and most support depositing checks. The Credit Unions are like banks, but invest all their profits to give members lower rates and better service. They don't have shareholders to worry about or have derivatives to purchase and sell.

Keep an eye out in the news for "derivative crisis", as the crisis is inevitable with current falling value of most real assets.
Derivative Data Source: ZeroHedge"

May. 14 2012 12:28 PM

I may have posted this before, but here's a graphic representation of the amount of money involved in derivatives which the Big Banks have on their books. More money than in all the world's economies -- about 3 global economies' worth!

The biggest holder? JP Morgan at just over $70 TRILLION. About the size of the entire global economy. Waaaay Too Big To Fail, eh?

The visuals are pretty impressive. Scroll down to JP Morgan Chase at the bottom, as the holder of the most derivatives. How's that for conservative good management?

May. 14 2012 12:23 PM

Yes gary, you win.

...still stupid, unfortunately.

May. 14 2012 11:51 AM

"Lacking votes to pass legislation never stopped Democrats" - that's just a lie. it happens every day on both sides.

I didn't bring up reinstating G-S, nor claim that it casued anything. You are arguing with yourself.

May. 14 2012 11:35 AM
gary from queens

Dear RL:

Lacking votes to pass legislation never stopped Democrats from rolling out legislation, and then showing how obstructionist republicans are for not voting for it. Political demagoguery is the purpose of drafting bills for democrats. not for solving problems. Keeping disfunction is a tool to blame republicans.

I will flip the cards and tell you the answer: repeal of glass steagle was not the cause of the recession, the housing bubble, and debt crisis. MOST economists will agree with me.

May. 14 2012 11:27 AM
gary from queens

Dboy: when all you can resort to is ad hominems, I win.

May. 14 2012 11:20 AM

...she did not introduce a reinstate bill because she, and everyone but you, knew she did not have the votes. come on, dude, quit playing dumb.

May. 14 2012 11:16 AM

gary... i'm sorry you're so stupid.

May. 14 2012 11:08 AM
Gary from queens

Hey RL, I think you'll find that Pelossi made no effort to introduce such a bill to re-instate Glass Steigal. It would have been 100 times simpler that the complex Dodd-Frank monstrosity, which doesnt even address moral hazard or the causes of the credit crisis.

May. 14 2012 11:06 AM
John A.

An early lesson from my career: people like to go into management so they'll have people beneath them to blame first before they have to go.
a lesson from later: corrupt organizations like to have innocent people around to provide a good face to outsiders - if for no other purpose.

May. 14 2012 11:02 AM

@gary from queens

Simple answer: Because the Republican Senate would filibuster it.

Going back to what worked is not the answer, the Volcker Rule is the modern equivalent to Glass-Steagal. The Senate has filibustered that, too. Re-enabling the split between investment banking and public banking is a good idea.

The only solution, elect enough Democrats to neuter the Republican objections. Sounds extreme but I am convinced that the GOP does not have the country's best interest at heart.

May. 14 2012 10:59 AM
Jessie Henshaw from way uptown

Brian, Aren't we missing here that the whole "shadow economy" of financial trading is not really involved in lubricating the functioning of productive business markets, but people busily trading on their own accounts??

They're playing the "boys game" of mutual pick-pocket, aren't they, by a method designed to "sweeten the game" involving using their winnings to multiply their bets, their power and the stakes??

Isn't that it really, what's actually happening, ego war as a high stakes game. That tends to end badly, historically. The winner typically succeeds by collapsing the environment around them, like the winners in the housing bubble, or the winners in a Ponzi scheme.

When people get into creating addictive betting games for trading on their own accounts, it's inevitable that the winners win by multiplying the losses of others. Doesn't that end up making the "final winner" the biggest loser though, in an interdependent world where victory over others is collapsing your own environment?

May. 14 2012 10:56 AM

Did any of you watch the two Frontlines on Money, Power and Wall St? If we don't regulate the risky behavior the system WILL crash again. The only question is when. When it does, we need to be prepared to get more 'relief' for the little guy than we got the last time.

2% mortgages,
Credit card writedowns and
college tuition loan relief.

That is if we still have any stretch left in the system to bail them out again without crashing everything.

May. 14 2012 10:53 AM
GW from Manhattan

What they are doing is artificially inflating the economy by creating value/debt that is not there and then going to the Fed and asking for quantitative easing to cover their "losses" The Fed is forced to play "catch up" with the "money supply" most of which never sees the light of day and that is why there is no inflation.... and what we end up with is an ever escalating cycle of prime numbers followed by endless zeros that mean .....nothing ..... This is capitalism. Yes it all could be put thru for more productive investments in the economy , but civilization has been hijacked by this magical mystery tour of investment finance fantasy.

May. 14 2012 10:48 AM

come on, Gary, there are many pro-bank blue dog Dem's that there were never enough votes to re-state glass-stegal. Dems have never been as all-for-one/monolithic the way Repub's are. You could have answered this yourself, i'm sure.

May. 14 2012 10:48 AM
Rachel from upper west side

So when it comes to lending to small businesses, suddenly JP Morgan is cautious?!

May. 14 2012 10:47 AM


May. 14 2012 10:47 AM
Sophie from Poughkeepsie, NY

Too big to fail, also means way too big to change, until it all comes crashing down. That's what we're waiting for right?

May. 14 2012 10:46 AM

The banks are playing so many "hedges" that they can't be sure what's actually hedging and what's speculation.

Too many independent operations without coordination and maybe NOT ABLE to be coordinated.

Mortgages, commodities, student loans, credit cards, etc. all securitized in one or more forms then sliced & diced & sold down-market. Then there's the GS style pseudo-derivatives that aren't backed by mortgages, loans, cards, etc.

May. 14 2012 10:46 AM
The Truth from Becky

There is always risk involved with all investing. Sometimes you win and sometimes you lose, BIG.

May. 14 2012 10:45 AM

"Risk management" = passing the risk onto an unsuspecting dupe while keeping all the profits for themselves

May. 14 2012 10:45 AM
Bob from Huntington

Having heard portions of Jamie Dimon's conference call last week, I can say he impresses as someone who has all the decorum and eqloquence of a car wash manager. I'm sorry, that's probably an insult to car wash managers.

May. 14 2012 10:44 AM
Joe Mirsky from Pompton Lakes, NJ

In 2009, Chase stunned 800,000 of its credit card holders by raising the minimum payment from 2% to 5% with no opt-out to close the account and pay it off under the old terms, so people were really stuck.
Roast in hell Jamie!

May. 14 2012 10:43 AM
Ana from New Jersey

I am appalled that the executives involved in this fiasco are being afforded the opportunity to resign from their positions, rather than be fired.

May. 14 2012 10:43 AM
The Truth from Becky

It is not that you can't control "money" - you can't control the market. I am sure they didn't go in this hoping to lose billions of dollars.

May. 14 2012 10:43 AM
Jeff Park Slope

Too big to fail is a huge problem, it is crony capitalism and the moral hazard it creates results in incorrect allocation of risk (us) and reward (them) behavior. Still, unless I misunderstand, in this case, this action was legal, the only ones that took the loss were the shareholders, not the US government or taxpayers. Shareholders can decide to sell their stock or vote out Dimon. Contrast this with government scandals - Solyndra and other solar or battery production companies, the GSA (I think that was the agency) off-site scandal and other fraud and abuse that results in just about nothing being done to fix the problems. Chase's profits are huge. This particular event is unlikely to ruin them. No discussion of the upside of their ability to take risks by the way. I'm sure that this is huge.

May. 14 2012 10:43 AM

Deregulation = just another word for "above the law"

May. 14 2012 10:42 AM

Kate in the Bronx -- Occupy --and many others early on-- have been recommending that people take their money out of the Too Big to Fail banks and put in in credit unions or smaller regional and local banks with greater tendency to deal more conservatively with their customers' money.

But I don't know why you're banking with Chase, and perhaps they can do things for you others can't? Check it out. If it's basic saving and checking, credit unions are, on the whole, much more concerned about their customers, who are considered members and have voting rights for some mamagement offices and the board. My credit union tends to have a lower rate on its credit card and also have lower fees.

May. 14 2012 10:41 AM
Paul from NYC

Please speak to the direct connections between Jamie Dimon and the Obama Administration through the former Chief of Staff. I'd just like to throw that out there before every listener jumps to the conclusion that these people are republicans. I believe Dimon donates predominantly to Democrats.

May. 14 2012 10:41 AM
David from Rockland County

Please explain why this not a "tempest in a teapot" if, even after the loss, the bank still shows a profit.

What about "the whale"?

Have his trades this past year still made a profit, on balance, even after the $2 billion loss?

Would we expect that those who have hyge gains, like "the whale," would also have huge losses? Would you expect that those who win big would always win?

Please explain.

May. 14 2012 10:41 AM

Hmm... where are all our Randian, "None For All, All For Me", NO REGULATION, less government, Ron Paul, KoolAid-drinking, idiot commenters, on this one???

May. 14 2012 10:41 AM
fuva from Harlemworld

OK, hedging is betting as insurance for an investment, and speculating is just betting. Here, the distinction is not relevant. The point is that JP Morgan made a complicated bet that they didn't understand. With the financial industry, COMPLEXITY is the problem. It needs regulation.

May. 14 2012 10:41 AM
David from West Hempstead

You just said that the portfolio being managed by the office is over 400bil... why is a 2bil loss drawing all this attention?

May. 14 2012 10:40 AM
rai from ny, ny

JP Morgan Chase is the result of a merger between Morgan Guaranty Trust, a bank, and Chase Manhattan Bank, not between Morgan Stanley, an investment bank, and Chase.

May. 14 2012 10:39 AM
Ron from Manhattan

The regulators are reviewing this NOW??? Why didn't they pick this up prior to the trade? I'll tell you why: Firms don't respect the regulators as they are financially supported by the firms, thus there is a conflict of interest. That's why they missed Madoff too!

May. 14 2012 10:38 AM
gary from queens


If repeal of Glass-Steigal was the cause of the bank failure of 2008, then why hadnt the Democrat-controlled House and Democrat-controlled Senate and the Democrat President re-enact that law between 2009 and 2011?

May. 14 2012 10:38 AM
jon from New York City-Financial Firm

Actually banks are allowed under Dodd Frank to hedge up to 3% of their tier capital ratio. In addition Volker has been torn apart so much that it is on hold till 2014. Accoridng to Matt Taibi's article in the most recent Rolling stone.

May. 14 2012 10:38 AM
Bob from Flushing

So, absent the regulatory constraints of Glass-Steagall, it only took the banks eight years to destroy the economy. Pretty impressive.

May. 14 2012 10:38 AM
Ron Alterman from Cambridge, MA

This is simple: bring back Glass-Stiegel. Put back the wall between government(tax-payer)-backed commercial banking that is essential to the real economy and the gambling of investment banks. No more too big to fail.

May. 14 2012 10:37 AM

...Jamie Dimon and the president of Columbia University, Lee "Student Loan Don't Pay Your Adjucnts $2M Salary" Bollinger - BOTH SIT ON THE BOARD OF THE NY FED!

May. 14 2012 10:37 AM

Deja vue of the movie "Margin Call"?

Having seen "Margin Call" a week or so ago, I kept thinking about that inside view of bet gone bad might be replaying at JP Morgan Chase. Not totally comparable, in that in the movie, the head honcho was involved but not going in front of the press -- at least not as shown in the first, what, 24 or so hours.

But relative innocents inside the firm got axed -- and people who had warned about the problems were given up as sacrificial lambs to show the Street and the Market the firm had everything under control.

Looks like Dimon has now thrown out the sacrificial lambs.... The innocents who were just doing their jobs will be next?

May. 14 2012 10:36 AM
Zuwena from Manhattan

It is so obvious at this point that we "little" guys are mere pawns in a rich man's game. When will this stop. These "rich" guys only think in terms of how much more they can get, no matter the expense to society. We [the world managed by the rich] are truly on our way to hell.

May. 14 2012 10:35 AM
Kate in the Bronx from Bronx

Question--can I take my money out of Chase (say, $100,000) as a protest against this speculative behavior, or am I such a "small" account they would be glad to see me go? How about if we all did that?? Would it make a difference?

May. 14 2012 10:34 AM
Casandra from Bridgeport, CT

I have an account with Chase, I would like to know how exactly would this effect me directly.

May. 14 2012 10:34 AM

...losing their jobs???


May. 14 2012 10:33 AM
Chris from Manhattan

Question: JPM was apparently speculating on a type of credit index. But was it selling protection (CDS's) or buying it?

May. 14 2012 10:33 AM
Truth & Beauty from Manhattan

Someone needs to do something about regulating these d--n banks! With huge losses like this and no interest, who wants to bother putting money in? Right now, I use Chase as a clearing house - just to pay bills. I'm keeping my money in a steel mattress.

May. 14 2012 10:33 AM

Jamie Dimon is also on the board of the Federal Reserve Bank of New York. Senate candidate Elizabeth Warren is calling on him to step down from that post immediately.

May. 14 2012 10:32 AM

...these poor bankers, they are really being persecuted.

They're just trying to earn a living...

May. 14 2012 10:31 AM
Ron from Manhattan

I find it interesting that financial firms are blaming losses on "Rogue Traders", these days, when in fact there are supervisory procedures in place to protect against such losses, and supervisors who are responsible, ultimately responsible for all trading activity.

May. 14 2012 10:31 AM



...more enormous, world economy destroying, too big to fail bail-outs.

It's just common senses.

May. 14 2012 10:30 AM

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