What happened at JPMorgan Chase?
This comment is purely opinion, based on questionable media reports. While working at the firm at one time, it has been nine years since my time there. None of this is based on anything other than guesswork, and although I do know some of those involved I have not talked to them since leaving the firm. That's all just to say that there is nothing here that might be considered anything other than speculation(bad choice of words maybe).
JPM was executing a macro hedge against significant loan exposure both in Europe and maybe more importantly against the portfolio from the Washington Mutual forced or flawed acquisition. The CIO has generally been brilliant over many years, so that is baffling from the start. The CEO Dimon is known as a hands on capital markets leader like no other, so there is another baffling attribute to this.
Really simply speaking, JPM executed such huge hedges that they eliminated the liquidity in the market to modify those positions. Hedge funds and other sharpies in the derivatives market saw their dilemma and squeezed them when they began an attempt to modify their hedge. Exactly why they made such huge one sided hedges that could have had some value in the long term(three to five years) and then based on short term market moves worked to back out of their hedges with, I guess, long derivatives to modify their egregious mistake of overwhelming a derivatives hedging position is unclear. Much is unclear, and here there is certainly not the expertise to get behind it all.
One really troubling aspect, or ironic aspect of this, is that it all happened out of the London trading operations. That's remarked upon because after the evil Spitzer forced Greenberg out of AIG(acquitted of all charges eventually), the clueless Martin Sullivan became CEO and let 50 traders in London put on all of the credit derivatives that virtually destroyed one of the greatest global insurers and financial companies in the world.
Now JPM apparently at the CIO level, maybe even CEO level, decides to set up a derivatives based macro hedge and hands it over to 40 traders in London. Here comes some completely politically incorrect commentary, because there are good people in all nationalities, but not necessarily in financial services. The 33 year old "whale trader" that put on the billion dollar hedge in a thin market was Russian, the head CIO in Europe was hired several years ago and was Greek. Totally politically incorrect I know, but the cultures these men come from are not uniformly risk averse or at times the least bit prudent, quite the opposite.
Russia is just chronically corrupt, almost manically so. Giving this 33 year old the ability to overwhelm the liquidity of a market was close to insane. He and his Greek counterpart may be fine people, but we are all influenced by our cultures. There should obviously have been more oversight and more division of responsibilities.
Fortunately, JPM can handle this. Macro hedges are not against the law and can often be soothing to investors. They know that they are giving up some upside but they are also being protected from some downside. Jamie Dimon did not point fingers at anyone but himself and his team. Other CEO's would have blamed outside events(Spain bonds, speculators, bad accountants, fraud, rogue traders, etc.) but Dimon just played it straight, to his credit. JPM's macro hedge was flawed. To quote him, "this does not violate the Volcher rule, it violates the Dimon rule."
How it was flawed is still unclear, and if explained to a layman like myself it would probably still be unclear. JPM was prediciting $19 billion in earnings for 2012, and now it may be $17 billion. The numbers, however, are still coming in and due to some unwinding of other hedges some reports suggest that the net loss may be $800 million as opposed to $2 billion. Other comments by Dimon suggest that more losses could be coming but would be closed out by year end. Investors absolutely hate uncertainty so those comments should be priced into the stock now, one would hope.
It's all too early to say what happened, but this was just too juicy a story to not write about, especially given my distant knowledge of the firm and my respect for many of the people there. Not all, I must add, but most.
JPM was executing a macro hedge against significant loan exposure both in Europe and maybe more importantly against the portfolio from the Washington Mutual forced or flawed acquisition. The CIO has generally been brilliant over many years, so that is baffling from the start. The CEO Dimon is known as a hands on capital markets leader like no other, so there is another baffling attribute to this.
Really simply speaking, JPM executed such huge hedges that they eliminated the liquidity in the market to modify those positions. Hedge funds and other sharpies in the derivatives market saw their dilemma and squeezed them when they began an attempt to modify their hedge. Exactly why they made such huge one sided hedges that could have had some value in the long term(three to five years) and then based on short term market moves worked to back out of their hedges with, I guess, long derivatives to modify their egregious mistake of overwhelming a derivatives hedging position is unclear. Much is unclear, and here there is certainly not the expertise to get behind it all.
One really troubling aspect, or ironic aspect of this, is that it all happened out of the London trading operations. That's remarked upon because after the evil Spitzer forced Greenberg out of AIG(acquitted of all charges eventually), the clueless Martin Sullivan became CEO and let 50 traders in London put on all of the credit derivatives that virtually destroyed one of the greatest global insurers and financial companies in the world.
Now JPM apparently at the CIO level, maybe even CEO level, decides to set up a derivatives based macro hedge and hands it over to 40 traders in London. Here comes some completely politically incorrect commentary, because there are good people in all nationalities, but not necessarily in financial services. The 33 year old "whale trader" that put on the billion dollar hedge in a thin market was Russian, the head CIO in Europe was hired several years ago and was Greek. Totally politically incorrect I know, but the cultures these men come from are not uniformly risk averse or at times the least bit prudent, quite the opposite.
Russia is just chronically corrupt, almost manically so. Giving this 33 year old the ability to overwhelm the liquidity of a market was close to insane. He and his Greek counterpart may be fine people, but we are all influenced by our cultures. There should obviously have been more oversight and more division of responsibilities.
Fortunately, JPM can handle this. Macro hedges are not against the law and can often be soothing to investors. They know that they are giving up some upside but they are also being protected from some downside. Jamie Dimon did not point fingers at anyone but himself and his team. Other CEO's would have blamed outside events(Spain bonds, speculators, bad accountants, fraud, rogue traders, etc.) but Dimon just played it straight, to his credit. JPM's macro hedge was flawed. To quote him, "this does not violate the Volcher rule, it violates the Dimon rule."
How it was flawed is still unclear, and if explained to a layman like myself it would probably still be unclear. JPM was prediciting $19 billion in earnings for 2012, and now it may be $17 billion. The numbers, however, are still coming in and due to some unwinding of other hedges some reports suggest that the net loss may be $800 million as opposed to $2 billion. Other comments by Dimon suggest that more losses could be coming but would be closed out by year end. Investors absolutely hate uncertainty so those comments should be priced into the stock now, one would hope.
It's all too early to say what happened, but this was just too juicy a story to not write about, especially given my distant knowledge of the firm and my respect for many of the people there. Not all, I must add, but most.
posted by John Borden at 12:37 PM
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