Sheriff Volcker And The London Whale

I decided the baptists-bootleggers dynamic of the JP Morgan story mentioned below – or at least, what I think/gather could be going on from what’s been reported (and speculated) about it – is better illustrated in my favorite literary style, the Abridged Movie Script.

(c) 2012 ASSCAP

The Abridged Script

Title card: "Some time ago..."




BRUNO (typing): Hey can I go massively long some IG9 for some reason no one understands?

BANK TRADER 1: Ok done.

BRUNO: Hey can I go more long IG9?

Ok done.

BRUNO: More?

(pause) (pause)
k done

This REPEATS multiple times over MANY MONTHS OR MAYBE YEARS, with linearly-increasing WHINING from the MARKET MAKERS, over a MONTAGE of time-appropriate NEWS EVENTS including the INAUGURATION of PRESIDENT OBAMA, set to "GOOD RIDDANCE (TIME OF YOUR LIFE)" BY GREEN DAY, until it has become the PRESENT DAY and BRUNO is now WAY THE FUCK LONG.


Title card: "Two months ago..."

A HEDGE FUND TRADER sits at his terminal. He is dressed for GOLFING since his TEE TIME is 3pm.

HEDGE FUND TRADER (typing): Hey IG9 seems richer than it should be. Why?

BANK TRADER: Cuz the JPM CIO, traded by BRUNO, whom the press will later pretend we all call the "London whale", keeps going long. We can't afford not to tighten it to avoid getting hit too much, or we'll get yelled at by our risk group and/or get run over and make even less money than we're already not making.

HEDGE FUND TRADER: What's a 'risk group'?

Phone rings.

BANK SALES GIRL: Hi, would you like a two-page PDF of our IG9 analysis? It has our letterhead and our unique color palette, so that's something. Also shouldn't we all go out so me and a slightly different collection of shabby bank drones than last time can buy you dinner again?


(yawns) (takes a bite of black caviar)


HEDGE FUND ANALYST: Hi I looked at their PDF. It shows IG9 is tighter than arithmetic says it should be, as we already knew, since our analysis is better than theirs anyway, making one wonder why we needed them in the first place.

HEDGE FUND TRADER: Ok well maybe that means they're the dumbest bank and will thus give me the best price, so I should stay 'loyal' to them, leading them to think they are doing well by 'serving clients' and shit, rather than just getting ripped off. (typing) Hi trader can I go short some IG9 at the spread you just showed without realizing that you are now crossable, only, I'm gonna haggle a bit more and not even pay that, and let's do it as a skew trade cuz that's sort of quanty and makes us all feel smart?

BANK TRADER: Ok done. Thanks for the trade!


Title card: "Present Day"

HEDGE FUND TRADER (typing): Hi trader why hasn't my unfunded trade made buttloads of money in a short time yet? Shouldn't the price be more like the where-it-should-be price by now and not still at the richer-than-it-should-be price, thus making me money? Why, I ask you?

BANK TRADER: Not in so many words, but, Bruno.

HEDGE FUND TRADER (fists clenched, looking up to crane-mounted camera): BRUNNOOOOOOOOO!!!!!!!


STEPHANIE sits at her DESK which is FLUORESCENT ORANGE PLASTIC or some crap, like everything else in the BLOOMBERG OFFICES. STEPHANIE picks up a see-through FLUORESCENT GREEN phone that's ringing.

STEPHANIE THE BLOOMBERG REPORTER: Hello, would you like to tell any inside information to a Bloomberg reporter for unspecified purposes of dubious motivation?

HEDGE FUND TRADER: Yes. You see there's this guy named Bruno who's distorting a credit index with his trades. Sapping its precious bodily fluids. If there's one thing I think America cares about, it's the purity and sanctity of a synthetic credit index. (Also, as an unrelated aside, he's making its price be different from what I have a financial interest in its being.)

STEPHANIE THE BLOOMBERG REPORTER: I can't wait to publish this story in which I am not in any way being used but, rather, have done some great reporting. But of course I have to call others for comment.


STEPHANIE THE BLOOMBERG REPORTER: Hi can you confirm that Bruno has been doing huge trades that have (looks at notepad) 'broken' the (looks) 'Markit See Dee Ex Dot Enn A Dot Eye Gee Dot Nine' index?

BANK TRADER: You must think I am a fucking moron if you think I am going to talk to you in any way. How did you even get through to my line? Fuck now I have to notify both LCD and the Public Relations department, fill out 7 notarized disclosure forms, and take 90 minutes of web-based training. Fuck!

STEPHANIE THE BLOOMBERG REPORTER: So, off-the-record confirmation then.


SHERIFF VOLCKER sits at his desk twirling his BADGE and admiring himself in a MIRROR. HEDGE FUND TRADER enters with the CHURCH LADY, a BLOG COMMENTER FROM THE 99%, and an army of ECONOMISTS.

VOLCKER: Hi did you know I have a Rule named after me, reluctantly? Now what can I do for you?

HEDGE FUND TRADER: Have you heard about what JP has been doing?


HEDGE FUND TRADER: Don't you read Bloomberg news?

VOLCKER: Bloom what now?

HEDGE FUND TRADER: Geez, why did I bother leaking to them. Well anyway I'm very sincerely concerned as a concerned disinterested concerned American citizen. I think JP Morgan might be doing some trades that a guy like you would count as prop trades and then try to clamp down on, which might lead to a chain of events that coincidentally would make me money. This (their alleged prop trading) makes me very concerned, as it does this here church lady. (points at church lady)

CHURCH LADY: I don't know what any of you guys are talking about, but I'm very concerned about it all. Please add my voice to that of this random person who pulled me off the street when gauging how concerned public opinion is about all this, whatever it is. Think of the children!

BLOG COMMENTER FROM THE 99%: Me too. I too have no idea what any of this is but I heard there was a CDS involved. You just know anything with a three-letter acronym is bad news! They're all crooks! Up to their old tricks! Occupy everything!

VOLCKER: Well, as I have said in countless reluctant interviews, I don't want banks doing PROP TRADES whatever those are. I don't want banks taking any risk at all. (Just making buttloads of loans, which for some reason is totally hunky-dory.) If they do do trades, they should only do the kinds of trades that DON'T arbitrarily count as prop trades in my, Barney Frank's, or (most likely) some unnamed regulator drone's opinion. But are you sure the trade in question is a prop trade?

HEDGE FUND TRADER: (shrugs) Well kinda. Maybe, probably. Or possibly. I mean I guess it depends on what their purpose is and how you aggregate or define....

VOLCKER: Is it a prop trade yes or no? Gotta be either yes or no. All trades can axiomatically be uniquely labeled prop or not-prop.

HEDGE FUND TRADER (rolls eyes): Yes then.

VOLCKER (to ECONOMISTS): Does he speak the truth?

The ECONOMISTS open the TEXTBOOKS they carried in under their ARMS, to the definition of PROPRIETARY TRADING.

ECONOMISTS (unison): Proprietary trading, or "prop trading", is when a bank does trades for their own account, rather than on behalf of a client.

VOLCKER: So what does that mean, yes or no?

ECONOMISTS (unison): Proprietary trading, or "prop trading", is when a bank does trades for their own account, rather than on behalf of a client.

HEDGE FUND TRADER: That means yes, Sheriff Volcker. Also, um, Too Big To Fail and Moral Hazard. Plus, Volcker Rule.

VOLCKER: Hey! That's my Rule! And my Rule says no (draws face into a visage of pure horror and disgust) PROP TRADING!

ECONOMISTS: We have no practical idea about any of this trading stuff, to be honest. Is any of this publishable? Whatever happens we'd still like to publish on it if that's ok.

They DO.


Title card: "Later that day..."

BRUNO looks at a printout of his trading position. Camera zooms in to show a single line item: "IG9: long: 20 kajillion".

BRUNO (to himself): I wonder idly if this is enough for whatever the heck it is we need this for?

Phone rings. BRUNO picks up. It is JAMIE DIMON, CEO of JP MORGAN.

JAMIE: Hi Bruno. This is Jamie, which is seriously the first name I actually use even though I am a wealthy grown man and neither a college coed girl nor a 5-year-old British boy.


JAMIE: I just got a call from Sheriff Volcker. He thinks, due to a totally-disinterested tipoff he received, that you're doing prop trading.

BRUNO: Huh? But we talked about this, I showed you all the numbers, these trades help hedge our...

JAMIE: Nevermind all that, I don't even know what this stuff is, it's all mumbo jumbo to me. But Sheriff Volcker said he'd sic Congress on us if we don't take this trade off immediately and inefficiently.

BRUNO: Take the trade off? Immediately? But do you realize how much that would cost?

JAMIE: Probably not. I have no idea whatsoever about any of this. But I am frightened by anything related to the government so just get it done. Whatever the hell it is, exactly. (hangs up)

BRUNO: Damn, now I suddenly gotta go short like 20 kajillion dollars worth of IG9. Where am I gonna find someone who'll sell me all that protection?

A new BLOOMBERG CHAT WINDOW pops up on BRUNO'S SCREEN. Camera zooms in. The window reads: "HEDGE FUND TRADER: hey bruno u randomly happen to need any ig9 protection right now by any chance cuz i could sell you some for only like twice what i paid for it?"

He DOES, and pays himself some fat PERFORMANCE FEES.




27 Responses to Sheriff Volcker And The London Whale

  1. Proptrader says:


  2. josh says:

    I think I learned something.

  3. Chris says:

    You are a bad man, and I bow in your general direction.

  4. asdf says:

    Your missing the biggest issue here.

    Why do all these things exist? Why does hedge fund guy exist? Why does IG9 exist? Why do we have banks full of thousands of people doing things each other don’t know or understand on thousands of different synthetic financial instruments?

    Are these things necessary to the point of banks (help the non-bank center raise money)? No. Why are they legal again? I mean at all. Why even have all these instruments and entities if they serve no purpose to the real economy?

    • I am always willing to entertain an actual argument that this, that or the other should be made illegal if such an argument is on offer.

      Regarding this issue, on a basic level IG9 like other CDS, and like all other legal products, exists because there is a demand for it. (If no one bought them, they would shrivel and die.) If you wish to ban them, okay, but (as with anything someone wants to ban) the onus is on you to make an actual argument for doing so.

      If ‘serves no purpose to the real economy’ was supposed to be your argument, I don’t see how that’s an argument. Plenty of things serve no purpose to the real economy without being made illegal. More to the point, one can make the argument that CDS do help the real economy because they allow shifting of and price discovery in credit risk, which helps, at least, good companies issue debt (=borrow money) at cheaper and more efficient costs – which by your own words is precisely what you think banks should be doing.

      Now, that doesn’t mean it is all candy and roses with CDS, but at least there’s an argument for them (and again, none for banning them, at least not here).

      It’s also worth pointing out that your quest to ban CDS would face a more uphill climb than you make it sound. In the current regulatory structure CDS are almost required – not literally so, but they are certainly highly incentivized in our capital rules. Your argument for banning CDS will need to include a completely-rewritten capital-rules framework in its appendix. Again, anytime you want to put such an argument forth, let me know, I’ll be here.


  5. asdf says:

    “Regarding this issue, on a basic level IG9 like other CDS, and like all other legal products, exists because there is a demand for it. (If no one bought them, they would shrivel and die.) If you wish to ban them, okay, but (as with anything someone wants to ban) the onus is on you to make an actual argument for doing so.”

    Why is the onus on me? This isn’t a product or service offered in the real economy. This is a financial product. If we deny people the right to buy something they “demand” in the financial economy the potential negatives aren’t nearly of the same magnitude as the real economy. For financial innovation* the burden should always be on proving it has a purpose.

    *Anytime you read the words “financial innovation” you should immediately read “some new way I can create an asymetric information and/or principal/agent problem to exploit for personal profit at the expense of others.”

    BTW, if your only arguements are ill defined liquidity or price discovery, full stop. That’s the bullshit fallback justification. People had the liquidity to issue bonds, equity, mortgages, and other instruments with real economy purposes at responsive prices long before we invented a bunch of derivatives based on them. The market would go on functioning just fine without them.

    “but they are certainly highly incentivized in our capital rules. Your argument for banning CDS will need to include a completely-rewritten capital-rules framework in its appendix.”

    I agree, but this can be changed. It’s a shitty justification for the way things are now.

    • The onus is on you because this is a thing third-party strangers are doing with each other that you (for whatever reason) wish to prevent. Very well then: what’s your reason?

      You can keep repeating the phrase ‘the real economy’ but it becomes less clear what you think you mean by that with each repetition.

  6. asdf says:

    “The onus is on you because this is a thing third-party strangers are doing with each other that you (for whatever reason) wish to prevent.”

    I disagree. You provide no justification for this statement. You take it as given. What is the philisophical grounding?

    The real economy is people making and providing real (non-financial) services for eachother. You go to the restaurant, real economy. You get a massage, real economy.

    • 1. You want to prevent third-parties from doing such-and-such.
      2. I say Fine, what’s your reason? (Not an unreasonable request, I would think.)
      3. You: I don’t have to give you one! What’s your ‘philosophical grounding’ for asking?
      4: I say: Fine, I’ll stop listening to you.


  7. asdf says:

    You’ll stop listening, but not because your right.

    What is your justification for people being able to do or not do such and such? If its plan a murder your certainly against it. So obviously some things are off the list. What is the criteria?

    • My criteria are, more or less, ‘violates others’ rights’. I don’t know what your criteria are because you aren’t saying.

      It sounds like it might have something to do with ‘helps the real economy’ (which as you can see isn’t where I would have drawn the line), except that when I explained how CDS help the real economy (the effect is undeniably there; only the size is debatable) you scoffed. So maybe the thing, to be asdf-kosher, has to ‘help’ above a certain threshold. Again I don’t know what threshold though because you aren’t saying.

      So that’s where we are. Let me know if/when you ever wish to make an actual argument.


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  9. asdf says:

    What are peoples “rights”? Where do these “rights” come from? Why are they important?

    Once we follow what I assume are your stated rights to their natural logical conclusion, we’ll get to my actual arguement.

    • Seems to me if getting to your actual argument for banning selling IG9 0-3 10y requires some kind of first-principles ground-up philosophical argument rooted in the definition of rights, there’s a problem. And on a more practical level, I don’t have the time/patience for it.


  10. asdf says:

    Well, when you’re in a big enough hole, I suppose its less bruising to the ego to keep digging rather then think how to climb out.

    • ?

  11. asdf says:

    If your first principals are wrong, or if you messed up your logical inferences early on, then discussing end conclusions is a waste of time.

    I know because we started arguing about end conclusions, and then you started throwing first principles at me (all this “rights” talk), but I’ve seen lines of arguement from such first principles before and they don’t support your end arguement.

    • For avoidance of doubt, we’re agreeing on the ‘waste of time’ part


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  18. This needs to be made into a TV-short. I would pay $10 to see this on film.

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