Satyajit Das: Topiary Lessons – JP Morgan’s US $2 Billion Loss

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By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010). Jointly posted with Roubini Global Economics

Having benefitted from risk management failures of others such as investment bank Bear Stearns and hedge fund Amaranth, JP Morgan (“JPM”) appears to have made an “egregious” and “self inflicted” hedging error. The bank would have done well to reflect on John Donne’s meditation: “send not to know for whom the bell tolls it tolls for thee”.

A US$2 billion Banana Skin …

The losses indicated are US$2 billion and may be higher. JPM’s share price fell around 9% (a loss of US$14 billion in market value) when the new was announced via a hastily arranged news conference. The bank also lost considerably more in reputation and franchise value.

The episode has all the usual trappings of a salacious trading disaster. Competitors had christened Bruno Iksil, one of the traders responsible – Lord Voldemort (after the Harry Potter villain). The position, which has been common knowledge in the market since early 2012 at least, was dubbed “the London whale”. After the losses were announced, the usual journalistic liberties have been taken – the whale has “beached” or “been harpooned”. A sub-editor gleefully coined the headline “Dimon is a Whale of a Hedge Fund Manager”.

But the losses raise serious issues. As they do not relate to the usual “rogue trading” incident which is typically dismissed as impossible to detect or control, the episode provides insights into the problems of modern high finance, bank strategies and regulation of markets.

Details are sketchy. The losses relate to a position taken to “hedge” a US$300+ billion investment portfolio managed by JPM’s Central Investment Office (“CIO”) overseen by staff including experienced hedge fund investment managers. The portfolio has increased in size from $76 billion in 2007 to $356 billion in 2011.

The objective of the CIO is hedging JPM’s loan portfolio and investing excess funds. During a 13 April 2012, conference call, Jamie Dimon, the CEO of JPM referred to the unit as a “sophisticated” guardian of the bank’s funds.

In its statement, the bank advised investors that: “Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed.”

The large investment portfolio is the result of banks needing to maintain high levels of liquidity, dictated by both volatile market conditions and also regulatory pressures to maintain larger cash buffers against contingencies. Broader monetary policies, such as quantitative easing, has also increased cash held by banks, which must be deployed profitably. Regulatory moves to prevent banks from trading on their own account –the “Volcker” rule- has encouraged the migration of trading to other areas of the bank, such as liquidity management and portfolio risk management hedging.

Faced with weak revenues in its core operations and low interest rates on cash or secure short term investment, JPM may have been under pressure to increase returns on this portfolio. The bank appears to have invested in a variety of securities including mortgage backed securities and corporate debt to generate returns above the firm’s cost of capital.

In 2011, the CIO portfolio contributed $411 million to JPM’s earnings, below its contributions of $1.5 billion in 2008 and $3.7 billion in 2009. JPM’s disclosures show that the unit took significant risk. Based on a common measure known as VaR (Value at Risk), the potential statistical loss for a single day was $57 million in 2011, similar to the $58 million of average risk in the bank’s larger investment bank and trading business.

The Art of Topiary…

The losses relate to an attempt to hedge the exposure on this portfolio.

As hedging would reduce returns, the strategy adopted appears to have been to buy insurance against default in the short term (to end 2012) and finance the hedge by selling insurance against default in the medium term (to end 2017). The structure took advantage of the difference in pricing of insurance between the two maturities of around 0.60-0.70% per annum. The strategic view was that risk would increase in the near term but abate in the longer term.

The choice of hedge instrument was an older “off-the-run” credit index -the CDX NA.IG (“North American Investment Grade”) Series 9. In all probability, the choice was driven by economic considerations. The constitution of the index may have provided a better match to the exact risk in JPM’s books. The pricing of the index may have been more favourable than more recent “on-the-run” index. The relative liquidity of alternative hedging instruments would have been a factor.

The choice may also have been motivated by the desire to mask the bank’s trading activities from other market participants to allow the position to be established without moving market prices. The particular contract, originally issued in 2007, was extensively used in a variety of structured products. This meant that trades could be disguised as hedging existing products or client positions rather than on JPM’s own account.

It is possible that the hedge could have been “juiced up”, that is, leveraged, by trading in different instruments such as the tranched version of the index to increase sensitivity to changes in market credit spreads.

With the benefit of hindsight, the trades seem to be no more than what Lord Voldemort might view as “school-boy spells you have up your sleeve!”

Imperfect Hedges…

In the conference call announcing the loss, Mr. Dimon explained that the CIO portfolio was a hedge for the bank’s balance-sheet risk. He stated: “It actually did quite well. It was there to deliver a positive result in a credit-stressed environment. And we feel we can do that and make some net income”.

It is questionable whether the CIO portfolio or the problematic positions could be regarded as a true hedge. It is complex and relies on the correlation between the bank’s underlying positions and trades. The effectiveness of the hedge also relies on the changes in credit pricing for different maturities. The simplest way to reduce risk would have been to sell off existing positions or offset the positions exactly.

The bank’s assertion that the entire set of transactions was both a hedge and a source of earnings is confusing. The bank should have heeded the warning of the seventeenth-century French author François de La Rochefoucauld: “We are so accustomed to disguise ourselves to others that in the end we become disguised to ourselves.”

Given JPM vaunted risk management credentials and boasts of a “fortress like” balance sheet, it is surprising that the problems of the hedge were not identified earlier. In general, most banks stress test hedges to ensure their efficacy prior to implementation and monitor them closely.

While the US$2 billion loss is grievous, the bank’s restatement of its VaR risk from $67 million to $129 million (an increase of 93%) and reinstatement of an older risk model is also significant, suggesting a failure of risk modeling.

During the conference call, Mr. Dimon conceded that the trades were “flawed, complex, volatile, poorly reviewed and poorly monitored … there are many errors, sloppiness and bad judgment”.

The episode also points to failures on the part of parties other than JPM.

Banks are now obliged to report positions and trades, especially certain credit derivatives. This information is available to regulators in considerable detail. Given that the hedge appears to have been large in size (estimates range from ten to hundreds of billions), regulators should have been aware of the positions. It is not clear whether they knew and what discussions if any ensued with the bank.

External auditors and equity analysts who cover the bank also did not pick up the potential problems. Like regulators, they perhaps relied on assurances from the bank’s management, without performing the required independent analysis.

Encouraging Pundits…

The losses are complicated by Mr. Dimon’s vocal opposition to some aspects of the re-regulation of financial institutions, especially Volcker Rule which seeking to restrict proprietary trading of banks. Given the fact that JPM survived the financial crisis relatively well and his personal high standing within President Obama’s administration (he was considered a potential Treasury secretary), Mr. Dimon has held the moral high ground in arguing for less stringent regulations.

In the bank’s annual report, Mr. Dimon wrote: “If the intent of the Volcker Rule was to eliminate pure proprietary trading and to ensure that market making is done in a way that won’t jeopardize a financial institution, we agree….We, however, do disagree with some of the proposed specifics because we think they could have huge negative unintended consequences for American competitiveness and economic growth”.

Banks have sought a weaker version of the Volcker Rule with broad remit to undertake “portfolio hedging”. This would allow banks to view an investment portfolio in its entirety and enter transaction to offset the risks of the entire portfolio, without the necessity of hedging securities or positions on an individual basis as would be required by a narrow definition of hedging. Banks argued that this exemption is essential to allow flexibility in managing risk within a large financial institution.

The JPM episode has helped re-open the debate. During his conference call, Mr. Dimon ruefully observed the bank’s US$2 billion loss “plays right into the hands of a bunch of pundits out there”.

Legislators and regulators now argue that the rules for portfolio hedging are too wide and effectively impossible to police effectively. In addition, the statutory basis may not support the rule. The legislative intent was intended only to exempt risk-mitigating hedging activity, specifically hedging positions that reduce a bank’s risk. Interestingly, drafters of the portfolio hedging exemption recognized the potential problems, seeking comment on whether portfolio hedging created “the potential for abuse of the hedging exemption” or made it difficult to distinguish between hedging or prohibited trading.

In a recent Congressional hearing, Former Fed Chairman Paul Volcker, who helped shape the eponymous provision, questioned whether the volume of derivatives traded was “all directed toward some explicit protection against some explicit risk”.

The pundits have been quick to suggest that the losses point to the need for more stringent regulations. But it is not clear that a prohibition on proprietary trading would have prevented the losses.

In practice, without deep and intimate knowledge of the institution and it activities it is difficult to differentiate between legitimate investment and trading of a firm’s surplus cash resources or investment capital.

It is also difficult sometimes to distinguish between hedging and speculation. The JPM positions which caused the problems were predicated on certain market movements – a flattening of the credit margin term structure- which did not occur.

Hedging individual positions is impractical and would be expensive. It would push up the cost of credit to borrowers significantly. All hedging also entail risks. At a minimum, it assumes that the counterparty performs on its hedge. But inability to legitimately hedge also escalates risk of financial institutions. Ultimately no hedging is perfect or as author Frank Partnoy told Bloomberg: “The only perfect hedge is in a Japanese garden”.

Additional regulation assumes that the appropriate rules can be drafted and policed. Experience suggests that it will not prevent future problems.

Bankers and regulators have always been seduced by an elegant vision of a scientific and mathematically precise vision of risk. As the English author G.K. Chesterton wrote: “The real trouble with this world [is that]…. It looks just a little more mathematical and regular than it is; its exactitude is obvious but its inexactitude is hidden; its wildness lies in wait.”

Human Sacrifices…

JPM indicated that it is trying to unwind its positions. Given the size, the level of losses may increase as markets may move against the bank as it tries to liquidate its position.

But JPM should survive this loss. The bank was quick to point out that the US$2 billion loss was offset by profits in other parts of the portfolio. According to the bank: “As of March 31, 2012, the value of CIO’s total [available for sale] securities portfolio exceeded its cost by approximately $8 billion.

The fate of specific actors is more difficult to predict. Mr. Dimon’s language in describing the losses was expressive:

“… Errors, sloppiness, and bad judgment… Badly executed, badly monitored. I’m not going to repeat it 800 times…“I know it was done with the intention to hedge tail risk… it was unbelievably ineffective…”

He seemed to be trying to distance himself and the bank’s Board of Directors from the failures praising the expertise of the individuals involved: “We added different types of people, talented people and stuff like that”. He was at pains to point out that the CIO until had been very successful to date.

But human sacrifices will be needed. The question is whether it reaches the executive suite or can be limited to foot soldiers. Mr. Dimon has admitted his credibility is at stake, though not necessarily his job.

What complicates Mr. Dimon’s position is that as recently as 13 April 2012, he indicated that the CIO positions were not problematic, dismissing the issue as “a complete tempest in a teapot”. After the losses were announced, Mr. Dimon admitted on US television that he was “dead wrong” to have dismissed questions about the issue.

Just Watch This Space…

The episode raises deeper concerns, beyond the issues at JPM.

How many other such problems in other firms remain undiscovered? JPM is a major player in credit derivatives and by no means the worst managed or the most aggressive in risk taking. If it curtails its activities then the loss of liquidity may affect other players and result in unrelated losses.

How has earnings pressure in banks affected their risk taking? Clearly, the large cash holdings of banks and the need to generate adequate returns for shareholders is encouraging risk taking.

How does regulatory initiatives and monetary policy action affect bank risk taking? Central bank policies are adding to the problem of banks in terms of large cash balances which must be then invested at a profit. The implementation of the Volcker rule may have had unintended consequences. It encouraged moving risk taking activities from trading desks where the apparatus of risk management may be marginally better established to other parts of banks where there is less scrutiny.

The most important question remains whether any specific action short of banning specific instruments and activities can prevent such episodes in the future. It seems as Lord Voldemort observed in Harry Potter and the Deathly Hallows Part 2: “They never learn. Such a pity”.

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    1. BS

      Take deposits, make loans. Problem is JP Morgan had 300b more deposits than loans, hence the CIO portfolio.

      To call it a hedge is pure fiction though. Yield enhancement plain and simple – gone disasterously wrong.

  1. CaitlinO

    “JPM may have been under pressure to increase returns on this portfolio”

    I suspect the pressure was entirely self-inflicted since increased earnings lead directly to increased bonuses for top management.

  2. Flying Kiwi

    “JP Morgan (“JPM”) appears to have made an “egregious” and “self inflicted” hedging error.”

    Warn a child that it will get hurt playing with matches and it will light one to prove it knows better, and when that one match doesn’t hurt it, it will light two; and when two matches don’t hurt it, it will light three; and when three matches don’t hurt it, it will…

    1. Bruce Krasting

      You’re kidding I hope. SS is the biggest derivative time bomb in history. The current unfunded liability is $8 trillion.

      SS is a bet on growth. If GDP is north of 3% on an extended basis, and unemployment is 5% or less, then SS will make it.

      But if growth is 2% and unemplyment 7%, then SS will blow up in our face in less than eight years.

      This derivate “bet” is being made by every person in the country.

      1. Jackie Drapper

        The Pentagon System bets on derivatives, the Peterson Baggers obession with SS is remarkable. That’s a clear indication it should be funded to overflowing. Cut the F22 the F35 and 3 aircraft carriers, that outa douche it. Krapping, why the hook to enter your smelly blog?

      2. LadyLiberty

        First of all Bruce SS isn’t a bet it’s a forced contribution and it is a DEBT that is owed to those forced to contribute. No different then any other debt the U.S. owes. In fact our govt. owes more to SS then anyone else!

        The TRUTH About Who Really Owns All Of America’s Debt

        I read your posts on ZH btw and one thing I am sick of all you economics poster’s misrepresenting is Social Security. Of all the govt. programs it is one of the best managed and it is SELF FUNDED not an entitlement unless you mean people are entitled to get back the money they were forced to put in. The fact that democrats have decided to use SS as another welfare program by mingling SSDI is not the fault of the people forced to pay in that should be stopped. Now look at those figures where would our govt. get $2.67 Trillion to pay back the funds “borrowed” from Social Security? As far as I’m concerned I believe it was an unconstitutional program to begin with but that’s water over the damn now. The politicians are the one’s to blame you can thank LBJ for putting SS money into the general fune we have a spending problem not a Social Security problem.

      3. F. Beard

        The US is monetarily sovereign; it cannot run out of money so SS and any other bills the US has can ALWAYS be paid.

        Not only that, but since SS is adjusted for inflation then seniors can be assured of getting real benefits.

        Yes, in the case of price inflation the rest of the nation would be paying an inflation tax but that’s life; the young support the old and in turn are supported when they grow old.

        It is demented to stick with gold standard thinking. The gold standard was rejected for good reasons. And look at the Euro – a virtual gold standard.

      4. maude

        So I guess we are all in it together and ought to get to work making sure unemployment goes down and growth goes up.

        Geez… Hyperbole much?

  3. mlnberger

    I appreciate Mr. Day’s sober, measured overview of the problem. This helps me get past the more salacious qualities of the episode, Mr. Dimon’s hubris, or suggestions of whales and octopi. I still believe that as long as we have banks who measure their assests in the trillions, this is our money we are talking about, and it is essential this be managed with extreme caution. Imagine the outcry if Social Security were to announce similar losses, or be guilty of similar “hedging”.

  4. Ellie Kesselman

    This is a calm, careful analysis by Mr. Dat, and is appreciated. Unknowns remain, and Mr. Dat does not stir up pointless speculation. What truly caused Mr. Dimon to downplay the looming severity of CIO losses as recently as mid-April? (I doubt that Mr. Dimon was so misinformed or “dead wrong”).

    Granted, it isn’t possible for regulators to control and oversee everything, always. For financial markets (or any business) to function, most participants must have a longer term perspective. Fear of catastrophic loss should temper short-term irrational behavior.

    I am not inclined to blame unintended consequences of the Volcker Rule. Risk management at J.P. Morgan should receive comparable levels of scrutiny, regardless of the trading desk. After all, using the models originally developed by J.P. Morgan as RiskMetrics (for VaR), there is a strong incentive to include diverse assets classes in the overall risk calculation.

    No, there are issues here that will elude the best efforts of regulators. There is no inherent sense of morality, loyalty to customers and shareholders, as well as to the U.S.A. during a very rough period of economic adversity by J.P. Morgan. Well, not by those who permitted this mess to occur. Fines are not effective. I suspect that nothing short of the Enron approach will have a positive lasting impact.

  5. JB

    Maybe it could be as elegant as this (notwithstanding congressional impasse)
    Strict, simple, clear rules and regs, full access by regulators to all books all the time = possible access to bailout if and when the other shoe drops.
    Participation in unregulated shadow markets = no access to bailouts. Choices and consequences: the value system supposedly embraced by and espoused in our free-market capitalist republic.

    From the oil patch

  6. Jonathan

    The irony will be, of course, that if the credit markets implode after the trades are taken off and the curve trade turns out to have been brilliant. Expecting to hedge tail risk should actually cost money. Perhaps thinking this kind of hedge was a free lunch was their primary error.

    The trading incompetence seems to have been the oversized position in an illiquid instrument and, maybe, a lack of understanding of the outright positions created when the dynamic hedging of the position isn’t or cannot be done. JPM was tortured by the market/press/transparency — hardly a new phenomenon but a cost of the trade that I suspect VaR is incapable of quantifying.

  7. Bruce Krasting

    Dimon acknowledges that JPM’s hedges were flawed:

    “flawed, complex, volatile, poorly reviewed and poorly monitored … there are many errors, sloppiness and bad judgment”.

    Das takes this and concludes:

    “The simplest way to reduce risk would have been to sell off existing positions or offset the positions exactly.”

    JPM admits to a screw up, but Das comes up with a riduculous suggestion.

    The risk is there. You can’t make it go away. Yes, JP could have sold it (or never have bought it in the fist place) but that does not make it go away. It would have appeared someplace else. There are no perfect hedges. That is why it is called risk!!

    The suggestion is that the bankers should stick to their knitting. They should take deposits and only make loans to AAA borrowers. No M&A loans. No LBO loans. No mortgages at all (they have proven to be very risky). The failure rate on startup business’s prove that banks should not be lending in that area either. Credit cards and car loans have high defaults so that would be eliminated as well.

    Basically Das wants the banks to loan money to IBM and Apple where there is no risk at all. But that does not work in the world that we live in.

    If Das accomplishes his objective he will have eliminated the risks that the financials take. Bully for him! But the cost to the economy would be very big.

    If you take the risk takers out of the risk taking business, you will have increased the risks of a blowup. It’s a risky world. You can’t change that.

    1. Cui Jin Fu

      This is a straw-man argument…Das doesn’t suggest the sweeping elimination of risk that you claim he does.

      At any rate, no one is saying that certain types of banks shouldn’t be allowed to take whatever risks they want. The problem is when these banks are taking huge risks with the implicit understanding that if things go wrong they will get bailed out by the government (but they get to keep all the profits if things go right).

      If you want to run a speculative investment bank, that should be done entirely separate from “boring” old-fashioned deposit-based banking.

    2. Matt

      “The portfolio has increased in size from $76 billion in 2007 to $356 billion in 2011.”

      Walks like a duck, quacks like a duck, ….

      JPMorgan largest US bank derivative holder 70 Trillion Notional, is down from 87 Trillion at end of 2008.

      The OCC also reports JPMorgan’s Total Credit Exposure has declined from 550 to 348 Billion from end of 2008 to end of 2011.

      How much of that decline was shifted into some other JPMorgan entity?

    3. Ellie Kesselman

      Bruce Krasting,
      No, it does not need to be as dire as that. I agree with you, in that there MUST be lending to businesses and individuals, by banks, in order to have any sort of vibrant economic activity.

      But you infer this from S. Das’s post incorrectly (although I acknowledge that you do spell S. Das’s name CORRECTLY, unlike what I did in my prior comment, I am embarrassed to notice):
      “The suggestion is that the bankers should stick to their knitting. They should take deposits and only make loans to AAA borrowers. No M&A loans. No LBO loans. No mortgages at all (they have proven to be very risky). The failure rate on startup business’s prove that banks should not be lending in that area either. Credit cards and car loans have high defaults so that would be eliminated as well. Basically Das wants the banks to loan money to IBM and Apple where there is no risk at all.”

      I don’t know what Das wants. I DO know that there WAS legislation put in place following the stock market crash and instability of the late 1920’s and early 1930’s: The Securities Acts of 1933/ 1934, and Glass-Steagall. They kept commercial and investment banking separated. There weren’t vast “financial supermarkets”. Let’s sort out what you have there now.

      Investment banks are the right entities for financing M&A and LBO’s. Some will be in the syndicate for debt issued by IBM, Apple, and AAA-grade transactions. Others will be “boutique” investment banks, like Drexel Burnham Lambert, bringing to market non-speculative grade debt offerings, perhaps shelf registrations, private placements, 144A securities for start-up’s. (If they are careless, or greedy, or unlucky, they might meet the same fate as Drexel. But that won’t drag down the entire financial system of the U.S. like a cascading power failure.)

      Then there will be a different type of entity: Merchant and consumer banks, with some overlap in small business banking. These banks will issue mortgages to individuals and businesses, based on adequate collateral percentages and creditworthiness. These institutions will offer car loans, boat loans and loans for purchase of equipment for means of production by start-up’s and smaller businesses after a standardized and consistent review process by loan officers. They will also issue credit cards. Insurance services might be offered through such banks, or maybe not. Maybe they will be offered separately, through insurance companies only.

      There will be firewalls. There will be many jobs for many people in financial services. Prime brokers won’t be owned by investment banks. Many people will be able to earn a decent living in this industry, whether investment management, banking, speculation, market-making, or other intermediaries. There will be less concentrations of capital among a few large entities. The Federal Reserve Bank can go back to doing what it did in the past, and will not need to be called in to do anything more than that.

      This was how we functioned for decades. It worked, quite well. There aren’t overwhelming structural changes that prevent it from being implemented again, other than the resistance of parties who would be negatively impacted. That was true in the past, however, and was overcome.

        1. Clark

          This kind of crap will never end until there’s a systemic meltdown, I’m afraid. I wish it weren’t so, but follow the money. As long as the pols are bought off there will never be reform of the real type. The fed gov got it right in the 1930s – but history shows that the moneyed interests will prevail. Until they can’t. If it’s two years or five years out, who knows. But it’s going to get ugly.

  8. ambrit

    To this ‘man on the street.’ (not the Street, mind you,) the ‘money quote’ from Mr. Days piece is “the large cash holdings at banks and the need to generate adequate returns for shareholders is encouraging risk taking.” This sounds suspiciously like an old style Commercial Investment Bank function. We should reimpose Glass Steagal and then let the ‘high flyers’ go belly up if they make stupid mistakes like this. The whole purpose of Glass Steagal was to protect ‘ordinary’ banks from risks like this. Consider it just another example of ‘The Wisdom of the Ancients.’

  9. mario

    No one concerned about high Q1 returns, but most shoked by the loss disclosed. But both specifically point to the same thing – high risk. I bet the risk was no surprise for the insiders.

  10. GeorgeK

    You hedge to protect a postive spread or lower risk, not to make a profit . The complication of the trasaction is mearly an effort to discuise a trading stragety.

    1. be'emet

      comment is right on. A hedging strategy by definition is designed to lose money, to offset risks of a primary strategy. If it doesn’t lose, then are sure to be far bigger losses elsewhere. So what’s the fuss? something strange is going on and hidden from the rest of us, likely outrageous gains in interest rate plays. That might really catch our attention!

  11. chitown2020

    Obama saying that because Chase is a BIG BANK it is O.K. that they lost $2 billion in customer money…..! And if it were a smaller bank they may have had to step in!!! What a joke……!

  12. Susan the other

    isn’t Das saying that if the Volcker Rule won’t work because banking has evolved into its own little shop of horrors, then something else must be done to control the situation. If banking is a rogue operation we are going to have to stop it. Turning all banks into utilities and restricting their profits to a minimum is a good start. Then they don’t have to devise their next nefarious scheme to make money for their shareholders. The holding pattern we are in can’t last forever; something is going to have to be done. How many more times are we going to accept these staged losses that private banks can take against their earnings (which I doubt exist beyond their world of fudged accounting)? Please tell me how the banking industry is ever going to unwind 600Tr in derivatives contracts, 2bn at a time pretending to have made a dumb hedge? Please.

  13. chitown2020


    1. chitown2020


      1. Jackie Drapper

        Ivent, isn’t there new housing being built near the former site of Robert Taylor? Get your kit and rent a condo on the south side, work at McDonalds if you need to. Don’t whine for communism! Redistribute the suburb!

  14. econ

    CEO of Toronto Dominion bank (one of the 5 large chartered banks in Canada) in response to JPM debacle noted that you are either a bank supporting the economy or not…hedging ops are not banking.
    The operation of the casino should not rely upon taxpayers only in bankruptcy and selling of their assets.

  15. damian

    the mathematical formulas are based upon assumptions or past behavior of the variables – when you have a corner of such size during periods when the correlations are changing – a little or a lot – you have a big problem – the math is not a formula it is about behavior that keeps changing – action begets reaction endlessly –


    there are no mistakes in any of this – other than assuming the relationships between variables would stay the same

    size creates the problem

  16. frank c

    Here is another maxim of LaRochefoucauld for Mr. Dimon
    “It is easy to be wise for others than for ourselves”.

  17. Matt

    “Banks are now obliged to report positions and trades, especially certain credit derivatives. This information is available to regulators in considerable detail.”

    What information there is in the City of London, stays in the City of London?

  18. Enraged

    “Given the fact that JPM survived the financial crisis relatively well…”

    Define: “relatively well…” I don’t call heavy bailouts (still unreimbursed, at the last news) surviving well. Otherwise, all of us who had to file for bankruptcy after losing our jobs, lost our houses, depend on limited unemployment and end up under the bridge are doing absolutely peachy and literally thriving: none of us has been bailed out, as far as I know…

    I guess it is, after all, in the eyes of the beholder.

    1. chitown2021

      Most of America saw the head schmuck tell us about his gambling exploits with false prophet David Gregory. So, instead of the appropriate image of a pathological, sociopathic-hood running around stealing houses, tax payer dollars and Democracy we see a well coiffed, charming Manhattanite who paid the police to put the hurt on protestors. Can’t wait to see where our Commander in Chief will put our troops next – on the street to protect JP Morgan?

      1. chitown2021

        There’s Liz-PAC again – calling for passing a new Glass-Steagall Act. The house just got done passing a bill to cut $36 billion from nutrition assistance programs, they seem to have other priorities.

  19. financial matters

    “”The bank’s assertion that the entire set of transactions was both a hedge and a source of earnings is confusing. The bank should have heeded the warning of the seventeenth-century French author François de La Rochefoucauld: “We are so accustomed to disguise ourselves to others that in the end we become disguised to ourselves.”””

    This pretty well sums it up. This was no hedge. It was a heads I win, tails you lose speculation with the taxpayers money. And I’m not so sure how disguised to themselves they are. They seem to be able to committ these crimes quite freely.

  20. Conscience of a conservative

    I find it more than interesting that the DOJ has gotten interested in this and not MF Global. Politics in the DOJ? You bet!

  21. Trader

    > The simplest way to reduce risk would have been to
    > sell off existing positions

    People seem to rarely mention this fact about bonds/credit default swaps.

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