JPMorgan Trading Loss May Reach $9 Billion | Hacker News Reader

JPMorgan Trading Loss May Reach $9 Billion

dealbook.nytimes.com

105 pointsJumpCrisscross65 comments

I'm not too surprised losses from this trade have continued to grow, because whenever such trades become public, other Wall Street firms tend to gang up on the other side of the trade, putting themselves in a position where they can demand growing exit costs from the party that is suffering the losses.

Moreover, when the instruments being traded are thinly traded or illiquid (as is the case here), the ability of other firms to inflict pain on the losing party is magnified. In the worst case, this can force the losing party into "sell what you can, not what you should" mode, possibly leading not just to firm failure but also turbulence in other seemingly unrelated markets.

No one knows with certainty how this situation will evolve, but many seasoned Wall-Streeters have been expecting JPMorgan Chase to announce growing losses for months -- for example, see http://informationarbitrage.com/post/23227611033/ltcm-amaran...

Yup, $2bn was an obvious low ball for even the depth of the loss itself, without compounding the ganging up on top. ZH estimated $5bn the day that JPM announced the loss. http://www.zerohedge.com/news/jpm-staring-another-3-billion-...

I read a lot of the same material, but its worth noting to those who aren't familiar with zerohedge that it is the biggest chicken-little as far as the global financial narrative goes.

Its partially "ahead of the curve" with respect to mainstream media, but often uses conjecture or hyperbole which makes it hard to separate fact from opinion.

Oh yes, you should take everything from ZH with a grain of salt. All of there posts are either eerily accurate financial predictions or ridiculous, conspiracy theory laden nonsense. (I think, they'd prefer to the call the latter 'prediction that haven't come to pass yet').

Sometimes I wish they didn't trade legitimacy for page views so I could send their links to others without people thinking I'm incapable of critical thought.

It also appears the JPM was nearly the entire market in the products they were trading. It will be extremely difficult to exit their position entirely. I suspect the real losses will be a good deal higher when it's all said and done.

The worst case scenario seemed to include that, it was $9B if they simply flushed the remainder. But it does remain to be seen where they will end up.

I'm curious though where is the story here? Is it that some bank made a trade they lost money on? Is it the ratio of income to trades? Is it just that 2, 6, 10 billion dollars still seems like a lot?

I understand that JPMorgan can lose credibility, and that credibility gap will lose it customers, but from an economic stand point they are simply meters on the money flow rather than the money itself. So I don't get how their poor planning actualizes in the economy itself.

It's that they're speculating with money from private savings accounts backed by the FDIC. If the company fails the government is on the hook in several ways. Privatization of profit and socialization of risk, etc.

This quote from the article describes the business model of many financial firms quite well:

"Essentially, JPMorgan has been operating a hedge fund with federal insured deposits within a bank," said Mark Williams, a professor of finance at Boston University, who also served as a Federal Reserve bank examiner.

Yep. You can either be a bank backed by the full faith and credit of the United States, or you can be a casino. You can't be both. Or at least that's how it would work in a world where the banks don't own Congress.

And even the casino analogy is largely unfair to casinos.

They don't get to bet against their clients, lie about returns, or collude with other casinos.

And that's even if we grant the rumors and whispers as true; that the casinos might have the gaming commission in their pocket the way Wall Street owns the ratings agencies, and that they may well get the same sweetheart penalty deals when busted, as Wall Street does with the SEC.

But even there, what casinos may be doing can't compare to what Wall Street does -- not even as open secrets, but on the public record.

I'm with you here, but isn't betting against their clients exactly what casinos do?

No, casinos take bets, they don't make them. Important distinction. They don't initiate anything.

Would saying that the casinos play the role of market maker be appropriate?

I don't see how trying to slot casinos into the market model would help understand them any better than simply understanding them as casinos. There isn't much of a liquid market of betting in a casino. Compare with Wall Street and its endless array of derivatives and hedges and mutual funds and all that stuff to... $25 on red. Wall Street may have elements of betting, but it's also a lot more. Casinos are much simpler.

There actually is. If you read the sites for serious gamblers, they pay lots of attention to the exact rules in place, especially for blackjack. It's defiantly not a commoditized industry.

There actually is... what? Variations in local rules do not a market make. Where's the arbitrage between the difference in local rules?

The gamblers visit the places with the best rules. If you're playing blackjack at $500 a hand, playing against a 1.1% house edge instead of a 1.2% house edge matters.

Close enough.

The market maker knows the odds and is incentivized to be honest with the customer, to keep their trust and get as many people to play as possible as it 'wins' only in the aggregate as more and more people play. [1]

But the point is that there isn't another, let's call it 'evil', branch of the casino, separate from the market maker. Where this 'evil' branch can bet against each gambler.

So now, instead of making 2% off a gambler, you can now make massive sums betting against any gambler you lure into horrible odds.

So the incentives have been thrown out of balance. Pulling in astute gamblers and making 2% becomes an inefficient strategy. Reeling in unsophisticated gamblers, luring them into games with terrible odds and then betting against them, becomes an optimal strategy.

And down that road, almost inevitably, comes distortion and outright fraud.

[1] Slot machines only earn something like 2% for the casino. It's more in their interest to be very transparent about those odds and get more people to play, than to be shady and try to squeeze out 3%. Because you'll lose more gamblers than you can get with a 'tighter' slot.

EDIT: to be clear, I only used 'evil' because the 'gambling against' branch was housed with and colluding with the market maker in this example. I have no problem with the analogous financial services. The argument is simply that you can't do both. It's bad for the market as a whole.

they're still betting against their customers. and not only that the odds are hard-coded stacked against the customer.

Not really. A casino could hire a bunch of professional/expert poker players, put them in the poker room, and have them literally play against the novice/intermediate guys. They would make a lot of money. But that's illegal.

On same games the casino just rake a bit off the top - basically a cover charge. Others the casino profits off you - but the odds are known.

A casino could hire a bunch of professional/expert poker players, put them in the poker room, and have them literally play against the novice/intermediate guys

This is actually done, and fairly common. Usually, casnios pay small-time pros a flat rate to seed poker tables, and don't take a stake in their wins or losses, but the point is casinos do hire pros to play against customers.

Not exactly. Hedges can blow up just like any other trade. There is a very gray line between hedging legitimate risks, i.e. moves in interest rates, and speculation that the interest rate will rise. In this case here they were trying to become more risk neutral to comply with coming regulations from Basel III.

That's starting to eat into the $14 billion of annual government subsidies that make up most of their profits.

But that's why the self-reliant, bold, risk-taking, money-spinning geniuses of Wall Street deserve the big bucks. Er...

To which subsidies are you referring to?

http://www.bloomberg.com/news/2012-06-18/dear-mr-dimon-is-yo...

Calling that a "subsidy" is stretching the English language quite a bit.

Try taking it away from the banks, and see how hard they fight to keep it.

Which suggests it is a real subsidy.

Using this logic, the following are subsidies as well: student loan guarantees, low student loan interest rates, tax deductions for mortgage interest payments, FDIC insurance of deposits.

English is not my native language, but yes, those are subsidies too.

Yep, they sure are. They are all benefits to particular groups that cost the government money to provide.

I don't think anyone here is saying that all subsidies are necessarily bad. Some activities are worth subsidizing. But let's not deny that that's what we're doing.

If the Federal government lends them large amounts of money at close to zero interest, and then the banks are allowed to turn around and lend it back out in the private sector at rates ranging anywhere from 3-20%+, I'd call that a subsidy. A huge subsidy or handout.

I know this question has been asked a million times since 2008, but is there really no way to remove banks and insurers from the 'too big to fail' category?

Given that they abuse the Lidor to their own profit, take billions in 'virtual subsidy' from the implicit protection of taxpayers, surely there are means to reduce the risk they apply to all of us

Can people tell me how naive I am being with some of the below ideas. Where is the list of actually well thought out ideas? :

1. Create global chapter 11 provisions and let them fail

2. Work out some way that chapter 11's wont snowball

3. create a single inter-operable modelling language so that trades are analysed in real time, and force all trades to be public. At least we know how bad it will be this time.

4. err - unicorns? Fairies?

(Honestly, I am asking serious questions. Otherwise its down to the nearest Occupy! rally for me)

Edit: can't do lists, removed the splenetic

There certainly is, but it won't happen, as the banks effectively control the government.

Really? They scare the government, certainly. But that's because we don't reallyknow how deep the debt goes.

But control? No more than music film arms and all the other big loosely organised industries.

See earlier comment about naive

All the outright crimes that went down and no prosecutions...doesn't that seem a little odd to you?

If something should be done because large banks are "too big to fail", what should we do about large state govts (CA at the very least) and the US federal govt? They're much larger and have militaries....

> "The chief investment office — which invests excess deposits for the bank and was created to hedge interest rate risk — brought in more than $4 billion in profits in the last three years, accounting for roughly 10 percent of the bank’s profit during that period."

The risk office was speculating, not hedging. If they are paid bonuses on profits then they are encouraged to speculate. That office should be bonused on having opposite P&L to the groups they are hedging.

Maybe we have a new record? http://en.wikipedia.org/wiki/List_of_trading_losses

Last one was 9 billion by Morgan Stanley in 2008

What derivatives in particular have been causing these huge losses? I understand they had to do with speculation on the creditworthiness of some entity but hadn't seen a full explanation.

Here is an explanation from Matt Levine: http://dealbreaker.com/2012/05/the-tale-of-a-whale-of-a-fail... .

And one from Lisa Pollack: http://ftalphaville.ft.com/blog/2012/05/11/996131/too-big-to... .

The understanding is that the JPM CIO was writing protection on CDX.IG.NA.9, a synthetic credit default index.

Man seriously, if I am going to be/am bailing these guys out I want some control over this crap. I am not sure what that control is or how it is done, but seriously the money here is just insane. And once again maybe the amounts are normal but the whole thing just seems out of control.

> Man seriously, if I am going to be/am bailing these guys out I want some control over this crap.

You're going to be bailing out the US govt, for far more.

How is that control thing working for you?

The person who invented the Wall Street business model is the biggest genius in human history.

Their "job" is to gamble with other people's money.

When they're lucky and gamble right, they keep a big chunk of the winnings.

When they're unlucky and gamble wrong, taxpayers pick up the tab.

Wow.

"Nonetheless, the sharply higher loss totals will feed a debate over how strictly large financial institutions should be regulated and whether some of the behemoth banks are capitalizing on their status as too big to fail to make risky trades."

These giant losses may be by design, or at least allowed to happen. It'll be interesting to see how fat Dimon's bonus is, for successfully exiting this money-losing trade. It used to be good to be king, now it's better to be "too big to fail".

IIRC about a week after it was first announced there could be a $2B trading loss at his bank, Dimon went to the Board of Directors and was granted a $23M compensation package.

There's a saying about pizza and sex. When they're good, they're really really good. But when they're bad -- they're still pretty good!

Banking: when they do well, they do really really well. But when they do bad -- they still do pretty good!

here's a good overview of some of the technical details by arnav guleria http://www.quora.com/Trading-finance/How-did-the-London-Whal...

So if they lost 9 billion, who gained the 9 billion? Where did the cash go to?

That isn't really how it works.

You buy shares of XYZ for $100. It falls in value to $50. Where did the $50 go?

What makes this especially disgusting is that JPMorgan doesn't fundamentally do anything to earn the vast majority of what it does. Apple earns billions but at least it designs, builds and delivers millions of tangible products that people love and use daily -- beautiful tools. JPMorgan, like many similar banks and Wall Street type entities, is essentially just a financial organism that has inserted itself into the world's money flows, and, for the most part, does not provide any tangible benefit to the rest of the society. If anything, I think it increases risk to society: greater chance of national economic crises, greater chance of wars driven by profiteers, distortions to the political debate and governance, etc.

What makes this especially disgusting is that JPMorgan doesn't fundamentally do anything to earn the vast majority of what it does.

Why is this "disgusting"? As long as they don't come to the taxpayers for a bailout it's somebody else's problem, namely JPM shareholders.

Certainly there is value in facilitating the "world's money flows"? Agreed that using taxpayer money to gamble is "disgusting" but surely the companies that do the things we all know and love (google, apple, etc) have benefited from the capital markets, and thus big banks like JPM. Without being public companies could google and apple have become what they are today?

Investment banks do serve a purpose though. If you need multi-billion dollar financing for a new project, the local credit union isn't going to help.

Plenty of company's use several banks at the same time so assuming you can get loans in the 300+ million range from mid sized banks it only takes 10 of those to get into the range where 3+ billion range. Is it slightly more efficient to deal with a single entity, sure but the overhead of multiple 100+ million loans is tiny relative to whatever your actually using the money for.

The best more concise description of what the problem is, from the article:

“Essentially, JPMorgan has been operating a hedge fund with federal insured deposits within a bank,” said Mark Williams, a professor of finance at Boston University, who also served as a Federal Reserve bank examiner.

Ge your money out of JP Morgan Chase, make sure it is under 200k.

This attitude right here is how things snowball into firm failures/recessions.

Go ahead and lose your hard earned money. It's only money right?

"It's just money, Sam. It's not real."

Foreclosure and starvation on the other hand....

The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

I wouldn't be all that worried though. I'm not sure if 9 billion puts a dent in their accounts. They move a lot of money.

JP Morgan is hardly going out of business.

"Lehman Brothers is hardly going out of business." - 2008

The difference is that Lehman's Bro's liabilities far exceed their liquidable assets or access to credit. JPM has sufficient liquidable assets to cover their losses, and is in a far better position to raise equity or access credit to cover any shortfall.

JPM also owns debt and securities in other financial institutions. Consequently, if they play hardball with JPM on this matter, it will simply return the favor at a later date.

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