Has Everyone Got The JP Morgan/Whale Story Backwards?
May 12, 2012 6 Comments
That’s my takeaway from this observation by Sober Look:
A two point drop (which is lower than the bonds above moved on Friday) in JPMorgan’s long term bonds results in roughly $5bn in DVA gains. This more than offsets the reported losses on the CIO’s portfolio.
Let’s do the math: -$2bln + $5bln = +$3bln net gain.
Hold on folks! From this don’t we infer that JPM CIO, far from going irresponsibly long, has actually left the firm dangerously net-short its own DVA? In other words doesn’t this mean that they massively underhedged? It appears they only hedged their DVA by 40%! What dereliction! Clearly this was nothing more than a ‘prop trade’ disguised as a hedged position. So, isn’t it irresponsible of JP Morgan, an FDIC-insured bank with implicit ‘too big to fail’ protection from US taxpayers, to make such a risky bet as one that could lead to P&L swings of $3 billion size? Shouldn’t regulators, and Paul Volcker, and Matthew Yglesias, and Barry Ritholtz, and (etc) now be clamoring for JP Morgan to go out and (say) sell 2.5x as much in equivalent IG9 10y to more properly and fully hedge this highly risky, volatile, opaque, and complex derivative massively short position that they evidently have on their books??
I kid, of course. But this does illustrate the silliness often involved in the thinking of those obsessed with banning ‘prop trading’.
awesome – see, their hedge worked perfectly! what’s hilarious is that when the Whale story first broke, someone (perhaps it was Lisa Pollack at FT Alphaville, although it may have been Levine) suggested (wrongly, I think, given the newer information) that the trade may have been a DVA hedge in the first place…
Yah, I originally saw that suggested by the same guy @Sober Look
http://soberlook.com/2012/04/london-whale-is-likely-hedging.html
I still think it’s possible that DVA hedging could be a component of what motivated their strategy (just not the entire story). Anyway it’s a good illustration of how what might seem like a ‘prop trade’ by itself actually turns into a ‘hedge’ if you zoom out a bit. And then back into a ‘prop trade’ if you step further backward. Me I don’t get why anyone thinks the brain damage is worth it.
Pingback: A Hedge By Any Other Name « Rhymes With Cars & Girls
we could make the same argument about JPM’s equity buyback: they have a $15B buyback active, right? stock is 10% lower… you do the math
Hmm and one wonders where they struck the shares they gave out to employees for the bonus pool…they could be sitting on a gigantic windfall this week!
Pingback: JP Morgan, Hedges and Proprietary Trades | Kid Dynamite's World