Monday, May 21, 2012

Highlights From Jamie Dimon's Call on JPM's $2 Billion+ Trading Loss on Synthetic Credit Positions

Listen to JPMorgan Chase's CEO Jamie Dimon explain how JPM's chief investment office in London lost $2 billion on synthetic credit exposure in only six weeks (and perhaps up to $5 billion as JPM unwinds its positions). Or now it could be $6 to $7 billion? Seriously?

"The number being bandied about now is closer to a range of $6 billion to $7 billion, according to several people working on trading desks that specialize in the derivatives JPMorgan Chase (JPM, Fortune 500) used to make its trades and from two sources with knowledge of the bank's positions." (CNN Money)


Huge wrong way "re-hedges" on the synthetic credit default swap index CDX.NA.IG.9, put on by the 'London Whale', were supposedly responsible for some of the losses. But the rest of the complex trade that blew up appears to be a mystery. The JPM Whale Watching Tour at FT Alphaville is trying to figure it out. And here's the original Bloomberg piece from April 6 that set everything off with CDX.NA.IG.9 (JPMorgan Trader’s Positions Said To Distort Credit Indexes). It is interesting that as of 12/31/2011, the total notional value of OTC credit derivatives held at JPMorgan Chase stood at $5.7 trillion.

Listen to highlights from the May 10 conference call below.


Mixed by DistressedVolatilityTV


From the conference call transcript:

"Regarding what happened, the synthetic credit portfolio was a strategy to hedge the Firm's overall credit exposure, which is our largest risk overall in its trust credit environment. We're reducing that hedge. But in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective than economic hedge than we thought."

"Exactly. The original premise of the synthetic credit exposure was to hedge the company in a stress credit environment. Our largest exposure is credit across all forms of credit. So we do look at the fat tails that would affect this company. That was the original proposition for this portfolio. In re-hedging the portfolio, I've already said, it was a bad strategy. It was badly executed. It became more complex. It was poorly monitored. We don't – obviously, we don't have to do anything like this at all, if we don't want. And I understand you can ask that question. So I don't want to give you specifics because we've already said we're not going to talk about the actual positions or anything like that."

"I know it was done with the intention to hedge the tail risk for JPMorgan, but I am telling you, it morphed over time and the new strategy which was meant to reduce the hedge overall made it more complex, more risky and it was unbelievably ineffective. And poorly monitored and poorly constructed and poorly reviewed and all that."

Source: JPMorgan (full conference call here)
Chart #1: Zero Hedge
Chart #2: Reuters

Related: Jamie Dimon on Meet The Press Talking About JPMorgan's $2 Billion Trading Loss

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