
JPMorgan Trading Loss May Reach $9 Billion - JumpCrisscross
http://dealbook.nytimes.com/2012/06/28/jpmorgan-trading-loss-may-reach-9-billion/?nl=business&emc=edit_dlbkam_20120628
======
cs702
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...](http://informationarbitrage.com/post/23227611033/ltcm-amaranth-jp-
morgan)

~~~
betterth
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-...](http://www.zerohedge.com/news/jpm-staring-
another-3-billion-loss)

~~~
alttab
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.

~~~
betterth
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').

~~~
alttab
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.

------
mrich
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.

~~~
BigTuna
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.

~~~
roc
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.

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

~~~
TylerE
No, casinos _take_ bets, they don't _make_ them. Important distinction. They
don't initiate anything.

~~~
cluda01
Would saying that the casinos play the role of market maker be appropriate?

~~~
jerf
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.

~~~
TylerE
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.

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

~~~
TylerE
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.

------
jonhendry
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...

~~~
cluda01
To which subsidies are you referring to?

~~~
jonhendry
[http://www.bloomberg.com/news/2012-06-18/dear-mr-dimon-is-
yo...](http://www.bloomberg.com/news/2012-06-18/dear-mr-dimon-is-your-bank-
getting-corporate-welfare-.html)

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

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

Which suggests it is a real subsidy.

~~~
refurb
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.

~~~
ScottBurson
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.

------
lifeisstillgood
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

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

~~~
lifeisstillgood
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

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

------
HockeyPlayer
> "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.

------
SuperChihuahua
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

------
cluda01
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.

~~~
superprime
Here is an explanation from Matt Levine: [http://dealbreaker.com/2012/05/the-
tale-of-a-whale-of-a-fail...](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...](http://ftalphaville.ft.com/blog/2012/05/11/996131/too-big-to-hedge/) .

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

------
tonetheman
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.

~~~
anamax
> 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?

------
continuations
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.

------
tectonic
"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."

------
genwin
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".

~~~
mkramlich
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!

------
meatsock
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...](http://www.quora.com/Trading-finance/How-did-the-London-Whale-lose-
JPMorgan-over-2-billion/answer/Arnav-Guleria?__snids__=46314309#ans1210502)

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

~~~
joshu
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?

------
mkramlich
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.

~~~
mynameishere
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.

~~~
Retric
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.

------
mkramlich
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.

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

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

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

~~~
getsat
"It's just _money_ , Sam. It's not _real_."

~~~
alttab
Foreclosure and starvation on the other hand....

