J.P Morgan Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money.
The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.
Having listened to the conference call (I was roaring with laughter), Jamie Dimon sounded very defensive especially about one detail: that the CIO’s activities were solely in risk management, and that its bets were designed to hedge risk. Now, we all know very well that banks have been capable of turning “risk management” into a hugely risky business — that was the whole problem with the mid-00s securitisation bubble, which made a sport out of packaging up bad debt and spreading it around balance sheets via shadow banking intermediation, thus turning a small localised risk (of mortgage default) into a huge systemic risk (of a default cascade).
But wait a minute? If you’re hedging risk then the bets you make will be cancelled against your existing balance sheet. In other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. A hedge is only a hedge if it covers your position. That is how hedging risk works. If the loss on your hedge is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging risk. You are speculating.
Dimon then stuck his foot in his mouth even more by claiming that the CIO was “managing fat tails.” But you don’t manage fat tails by making bets with tails so fat that a change in momentum produces a $2 billion loss. You manage tail risk by making lots and lots of small cheap high-payoff bets, which appears to be precisely the opposite of what the CIO and Bruno Iksil was doing:
The larger point, though, is I think we all know damn well what Jamie Dimon and Bruno Iksil were doing — as Zero Hedge explained last month, they were using the CIO’s risk management business as a cover to reopen the firm’s proprietary trading activities in contravention of the current ban.
Personally, I have no idea why the authorities insist on this rule — if J.P. Morgan want to persist with a hyper-fragile prop trading strategy that rather than hedging against tail risk actually magnifies risk, then there should be nothing to stop them from losing their money. After all, these goons would quickly learn to stop acting so incompetent without a government safety net there to coddle them.
The fact that Dimon is trying to cover the tracks and mislead regulators is egregious, but that’s what we have come to expect from this den of vipers and thieves.
azizonomics 
Pingback: Guest Post: Does Jamie Dimon Even Know What Heging Risk Is? | TheTradersWire.com
Pingback: Guest Post: Does Jamie Dimon Even Know What Heging Risk Is? » A Taoistmonk's Life
You nailed it!
Yeah, I am surprised at myself sometimes.
Pingback: Does Jamie Dimon Even Know What Hedging Risk Is? « Financial Survival Network
If J.P. Morgan want to persist with a hyper-fragile prop trading strategy that rather than hedging against tail risk actually magnifies risk, then there should be nothing to stop them from losing their money. After all, these goons would quickly learn to stop acting so incompetent without a government safety net there to coddle them.
Agreed! But that is precisely the problem – the government IS there to provide a safety net for Wall Street firms. Moral hazard, and all that. Don’t you just love it when the high and mighty, the holier-than-thou types like Dimon, end up getting hoist by their own petard? Schadenfreude, I know, but still it is nice to know that no one makes all the right moves everytime.
Does JPM have the guts to actually fire any of those arrogant, higher-up bastards who did these trades, who weren’t paying attention, who made the errors? Maybe, but I bet they throw one or two junior people under the bus and call it a day. Any chance JPM will actually claw back some of (I’m sure) multi-million dollar bonuses these fuck-tards received over the past few years? ZERO.
Failure is beautiful and natural. If you fuck up, you fail and you learn from the process. Denial of failure is denial of antifragility and thus denial of organic growth. Result is zombification and hyper-fragility. We already watched Corzine and Dimon blow up in the last six months, coming less than four years after Lehman.
WTF are you talking about? What a bunch of dross.
I’m talking about antifragility , a concept with which you do not sound familiar.
Thanks for the clarification & lesson.
I agree. The provision of clawback clauses will ensure these CEO’s listen to the risk averse technical types instead of the serial psychopathic sales type who are slaes sales sales at all costs. I have been drowned out in meetings and emails for being too cautious. They have chased market share and risk for too long. The support by the Government is encouraging moral hazard.
It can and does… if the business in question is not politically connected.
Pingback: Does Jamie Dimon Even Know What Hedging Risk Is? « What Rob Reads
Pingback: Does Jamie Dimon Even Know What Hedging Risk Is?
Jamie Dimon makes millions and billions of dollars a year…and if he is clueless it really indicates that we need a shake-up, these people need to be replaced with people who have tenacity, courage and integrity. Their failures should not be rewarded with bail-outs.
Glass-Stegall was a wise, necessary thing. What chance it will be brought back?!! Ha!
Glass Steagall was much better than the status quo, but it didn’t stop the banks mutating into the form we see today. I’d gladly take Glass-Steagall ahead of the status quo, but seeing as we’re having a tough time getting the Volcker rule passed it will be tough to get it reintroduced.
The big banks and Wall Street has made the failure of the Volcker Rule their prime objective. Big business complain about government regs but they have turned what could have been a fairly simple set of regs into a 17k pages of nothing except exemptions.
Pingback: Does Jamie Dimon Even Know What Hedging Risk Is? [azizonomics] « Mktgeist blog
Reblogged this on Hawks5999 and commented:
Aziz goes straight to the heart of the problem with bailing out anybody. The moral hazard created with JP Morgan has set them up to think they can just break the rules without repercussion. JPM knows that they are too big to fail and can suffer losses like this because the Fed or the Feds will bail them out. So they break laws and rules without the hint of regard. If JPM is acting like this, you better believe others are too. The bailouts of 2008 didn’t fix ANYTHING and they only exacerbated a problem. The only thing accomplished was buying enough time for highly connected people to get out of the system and hand the bag off to others… primarily taxpayers.
Agreed.
Now that we all see the situation, what is the next step? How do we get the politicians to act. Or are they in on the theft? I think there could be corruption at the highest levels. How can these lawmakers not see it?
I remember the Romanians protesting about the lies peddled on state news by turning their TV’s backward and displaying out their windows. How do we send a message that the game is up, and we are on to them?
There is now plenty of evidene to suggest that Wall St was bailed out, and nothing changed, which is clear theft.
I think OWS, Anonymous, AVAAZ, Wikileaks needs to have this presented to them in a manner that can be dispersed to their networks. A clear strategy needs to be developed to get into the mainstream.
I think we are seeing the end game now. What we do changes history.
What’s the next step? Dispense AK-47s to Occupy Wall Street with instructions to aim for the top-floor windows.
Or else make Jamie head of the NY Fed, so he will be in a position to be our next Treasury Secretary.
Make Ben Bernanke head of the fed. Oh. Wait. We did that.
Wait, I know, make Mary Schapiro head of SEC !! Oh. Wait.
I know, I know, make Timothy Geithner secretary of the Treasury !!!
Wait. Let me think about this some more.
No that would be a terrorist act. Luckily we still have the right to vote, and when people vote, and politicians lose their cushy position they act to keep the voters happy.
Basically people have been voting in a misinformed way, and the politicicians and powerful backers have been running a totalitarian regime under the cover of democracy.
That was hyperbole, as was the follow-up comment.
I use my real name, because unlike you Skptk, I actually want to do something about it, and if other people follow my lead, Politicians may read these blogs and realise real people are fed up with this criminal system.
Pseudonyms are ineffective. They might as well be written by robots. Apologoes for posters who use, but I feel strongly about this.
I visited a Mesopotamian Museum feature today, and the War in Iraq destroyed 4000 years of culture. The US Army had a base in an ancient fort. They dug up the ground to store shipping containers. The shaking of the earth caused crack in the buildings. Works of art looted and never recovered. The War and the Collapse of Wall St and subsequent bail out are criminal acts. People need to be put to death like we put the Nazis to death.
Pingback: Does Jamie Dimon Even Know What Hedging Risk Is? « Hawks5999
JPMorgan, which has yesterday admitted to a 2 billion dollar (probably) currency futures trading loss that dropped its shares by $7 +, is the major player here.
The original short silver portfolio was established by a trading group or trader at Bear Stearns, which went belly-up and was taken over by JPM with the portfolio intact.
As a result of some fancy changes in qualifications, JPM is a “Producer/Merchant/Processor/User” even though it isn’t. I’m not sure if it holds any physical silver (see more on this below) but it writes a huge pile of shorts, which are basically promises to deliver at a set price in the future. These are called ‘naked shorts’ because JPM is promising to deliver something that it does not own – a pile of silver in this case). It is thought that JPM is the holder of about 1/2 of the net shorts.
So
Total shorts – 53356
Total longs – 18175
Net shorts – 35181 contracts.
Each contract is 5000 ounces
Net short ounces (the # of ounces that would need to be delivered to satisfy all the paper contracts)
= 35181 x 5000 = 175,905,000 ounces @ 12 Troy oz/lb and 2000 lb / ton = 7329.375 tons
At $30 silver, this is $5.277 Billion.
If JPM is on the hook for 1/2, it would cost JPM about $2.6 Billion to cover their shorts *if* they were able to buy all that silver at today’s price.
But guess what will happen to the price if they are forced to cover? They will need to buy on the open market.
What will that do to the price? As it goes up, it gets more and more expensive to buy the next contract, and the next, and then the next, and then remember you are bidding against the owners of the other 1/2, who also need to buy physical for delivery. If it goes to $40, the cost to cover goes to 3.5 Billion. And at $50 (where it already (almost) has been), JPM will be out about $4.4 Billion.
So, what to do? Physical silver supplies are tight and total annual silver production from all sources (in 2007) was 911 million ounces
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Implied Net Investment
– 0.9 31.8 58.1 55.1 16.6 31.2 132. 184.6 164.0
Total Demand 868.3 881.9 882.4 931.7 925.6 911.4 915.0 931.7 1,074.7 1,040.6
Sorry about the line-up
Important thing is that the 164,000,000 physical silver Investment figure of amount used / produced in an entire year would not cover what JPM and buddies are short on paper. It would take a year for all the mines in the world to produce another quantum like that to pay off the paper shorts.
If JPM has egg on its face now, it will have a whole omelet if this happens. JPM’s saving grace will be if they have been able to hold the price down long enough that they have been able to accumulate enough physical silver (3500 tons bought at the prices that they artificially depressed) to simply deliver physical, satisfy all contract holders, and if they have enough silver left over they can make a profit as the price naturally goes up once they stop holding the price down.
If they are really crafty, they will not have told the holders of the other 1/2 of the contracts that they are buying physical to cover in secret.
That way, the ‘me, too’ shorters trying to mimic JPM’s (and originally Bear-S’) ‘brilliance’ will be caught with their shorts truly uncovered and will get creamed! Indeed they could be bankrupted.
Can you spell ‘market manipulation’???
But, hey, I’m an amateur, eh?
Right, I had wondered what that was all about.
A supposedly hedgable position costing only a few billion in a worst case scenario, but in the real world- (ie they would actually have to BUY that silver), totally impossible.
I suppose its a one way bet for them. They’re already holding the global financial system to ransom with their unwindable CDS, why not double up their leverage by screwing the PMs market ? And as long as Bernanke has a printing press, they can keep doing it.
What could possibly go wrong.
This is essentially a Martingale roulette strategy (simplistically doubling your bet until you win, or in reality trading bigger and bigger hedges on both sides of a position in the hope of building up a win/win position) same as what Bruno Iksil was doing. JPM and BAC seem to specialise in it, as did Lehman. I know a lot about this strategy… I used to do it in FX and commoditiy derivatives when I was 18 or 19 ’til I read the Black Swan by Nassim Taleb and learned I was onto a long-run loser.
Eventually, you will run out of money to continue making these bets. Now with the Fed and ZIRP acting as a backstop on liquidity, banks thought they could go on doubling.
Nope, because there is a hidden problem with the Martingale system beyond running out of liquidity… eventually you wil run out of counterparties, which is what I believe happened to the fail whale, whose bets became so big that the market became too small, and when they were sitting on an unhedged loss they couldn’t find a counter-party to whatever trades they wanted to make (and Dimon has the temerity to call this “hedging”!)
The logical conclusion to all this is that the Fed (shadow hedge fund) will act as that counter-party! And presto, there we have a system where the Martingale equation works! It’s called hyperinflation!
Sorry – forgot to introduce the above – I was writing to my daughters to explain why they should continue to hold silver in this manipulated market – take it from there.
What goes around comes around! Wasn’t it JP Morgan that ended up with the $1.5 billion dollars MF Global stole from its depositors?
A person I follow “Martin Weiss”and associates at Weiss research have talked about these bank derivatives for years and the ability to collapse a bank overnight.
The only solution–proven for 3 generations to work–is Glass Stegall! Deposit banks cannot run a casino. And if Casinos want to operated in Lower manhattan or The City, that’s OK in a “free market” but no one will think or allow it to pretend to be a BANK.
Glass Steagall was much better than the status quo, but it didn’t stop the banks mutating into the form we see today. I’d gladly take Glass-Steagall ahead of the status quo, but seeing as we’re having a tough time getting the Volcker rule passed it will be tough to get it reintroduced.
What I want to know is : When is COMEX going to land on Jamie for manipulating Silver Bullion? They only have over 30% of the market in hand. Is NOW too soon?
please enjoy and share this gem ….no risk at all …
JOHN…..The COMEX will never land on JPM, they are the facilitators of the crime in progress.Who do think sits on the Board of the COMEX????? Uhhhhh…..JPM. The COMEX is a for profit self regulated (yes you heard that right…..self regulated) entity. AND JPM is their biggest client….. These are all gangsters folks and they have the power to do what ever they want. THE QUESTION IS…..WHEN THE H— IS THE CFTC GOING TO DO SOMEHTING ABOUT IT!!!!!!!!!!!!!!!!!!! THESE PEOPLE ARE SUPPOSED TO BE PROTECTING US… The only colluson going on is between the CRIMEX, the cowards at the CFTC and the Hoolums at JPM
The comex may not land on J.P.M, but J.P.M’s own book may land on it.
you think jpm has crooks, do a little checking, hint cftc
Pingback: Double or Nothing: How Wall Street is Destroying Itself « azizonomics
Pingback: Double or Nothing: How Wall Street is Destroying Itself » A Taoistmonk's Life
The importance of Glass-Steagal is overrated. As Gillian Tett explains in “Fools’ Gold”, the repeal simply allowed what Wall St. was already doing in London to be done in New York. Also, it is important to remember that the most perfect regulation is pointless if it is not enforced. If the crisis has shown us anything, it is that there was a massive failure to enforce existing regulation across most state and federal financial regulatory agencies.
Pingback: The Absurdity of NATO « azizonomics
Pingback: Guest Post: The Absurdity Of NATO » A Taoistmonk's Life
Pingback: Propping Up The Gold Price? « azizonomics
Pingback: Propping Up The Gold Price? |
Pingback: Guest Post: Propping Up The Gold Price? » A Taoistmonk's Life
Pingback: Propping Up The Gold Price? » Bullion Insiders
Pingback: I Didn’t Build This « azizonomics
Pingback: The Cantillon Effect « azizonomics
Pingback: Propping Up The Gold Price?
Pingback: Too Big To Understand « azizonomics
Idk nothin but peopleare making new kinds of money because money
Is simply a token of worth between people. A trust.When it no longer is a viable medium the people understand we made this token work by approvingly supplementing it for these various values, the one coopertive real game humans all, play seriously to the point of extreme progress to extreme destruction, considering that humans made this and how long we have agreed to across the planet thousands of years then we could certainly cooperate to make another and do it without the 2 percentage of players that lied and cheated let it. become a thing that used people instead of something people used, thus fucking everybody up by witholding basic values as if we are hostages to
Living merely eating and shelter. No free cell phones are not tools they track the non playing persons who have run out of chips or reason to play part of the useless burden, especially when youcan buy a entire family in Bangladesh for $28 dollars for 2 generations of labor decades and decades from age 5 till death at maybe 55 And its thier debt to pass on to thier children, entire villages whose names dissapear every day I think. Its time to realize we made this game its ours we can certainly make a new gMe and quit this currupted no winner that has lost its rate of value unrepairably so think of how serious we all play so we could seriously all do anything else, easier then consumerism, scarcity, and fear is telling our collective subconsciousnesses 24 7 inescapably.