He Must Have Veered Off Into Icelandic Waters…

A little while ago, we briefly commented on JP Morgan's mighty derivatives trader in London, Bruno 'The Whale' Iksil (see 'Addendum 2'). It was reported at the time that he had become such a big force in the market for credit derivative indexes that people started complaining that his trades were distorting market prices and interfering with the legitimate hedging activities of other market participants.

This is what we said at the time:


“Readers may want to check out this article at Bloomberg about JP Morgan trader Bruno Iksil, who apparently is the biggest force in the market for credit derivative indexes. So big in fact that other market participants are now complaining that he has the power to distort the markets.

We would comment on this by noting that it can be very dangerous to be the biggest fish in the pond. If you ever get into trouble, the smaller fish will mercilessly attack you. For a while it can be very profitable to 'rule' a specific market segment – but even the biggest traders never truly 'control' a market. A good fairly recent example for this is the fate of the Amaranth Advisors hedge fund, which famously blew up after becoming the biggest trader in natural gas futures.

The CFTC charged the fund with 'manipulating natural gas prices', but in spite of the fund's apparent ability to influence prices by its outsized activities, it was this very market that crushed it in the end.


(emphasis added)

And this is what has apparently now happened to The Whale:



The whale gets it.



After the market close yesterday, JP Morgan announced it has suffered an unexpected trading loss of 'at least' $2 billion at its London based Central Investment Office (the loss is likely to grow as certain positions are unwound).

The press release and the meeting with analysts were dripping with expressions of contrition and remorse. They almost read like one of those self-accusation manifestos people were forced to read out in the show trials during China's Cultural Revolution.

They could for instance have said: “We lost a big load of money; sh*t happens sometimes in trading. No big deal, we'll get over it, and so will you.”

Instead, JPM CEO Jamie Dimon used phrases like:


“…egregious failure…many errors, sloppiness and bad judgment ….egregious mistakes, self-inflicted…”


We don't know if he was flagellating himself during the analyst meeting for emphasis, but it would probably not have looked out of place.



Jamie Dimon and Achilles Macris (chief of the CIO) yesterday.



Unfortunate Timing

As Bloomberg reports, the timing of this trading loss couldn't have been worse, as it will crimp JPM's lobbying efforts on behalf of weakening the so-called 'Volcker Rule' which seeks to ban proprietary trading by banks. Of course the activities of the CIO were officially all related to 'hedging'. The loss is therefore an example of, well, 'many errors, bad judgment, sloppiness and egregious self-inflicted mistakes', all in the course of perfectly legitimate hedging activity.  Rrrrright.


“The chief investment office was thrust into the debate over U.S. efforts to ban proprietary trading when Bloomberg News reported last month that the unit had taken bets so big that JPMorgan, the largest and most profitable U.S. bank, probably couldn’t unwind them without losing money or roiling financial markets. Dimon, 56, had transformed the unit in recent years to make bigger and riskier speculative trades with the bank’s money, five former employees said.


The U.K.’s Financial Services Authority, which regulates banks, is examining the role London employees played in the loss, according to two people familiar with the talks. The agency hasn’t opened a formal investigation and there was no evidence of criminal activity, these people said. The loss originated out of the firm’s London CIO unit, an executive at the bank said.

“I think it will weigh on the sector pretty bad,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia. Miller and Christopher Mutascio at Stifel Nicolaus & Co. downgraded their recommendations on the shares today. “Investors are going to say that these are general big black boxes that can’t be analyzed, not even the management companies understand what they’re doing themselves.”

Dimon had defended the Chief Investment Office as a “sophisticated” guardian of the bank’s funds on an April 13 conference call, calling news coverage “a complete tempest in a teapot.” On May 2, he led fellow Wall Street CEOs in a closed- door meeting to lobby the Federal Reserve about softening proposed U.S. reforms that might crimp their profits.


Yesterday, he said the timing of the trading blunders “plays right into the hands of a bunch of pundits out there” who are pushing for a strict version of the proprietary trading ban named for former Federal Reserve Chairman Paul Volcker.

Given Dimon’s resistance to the ban and new regulations, “he’s got a lot of egg on his face right now,” said Craig Pirrong, a finance professor at the University of Houston. “Any chance they had of getting a relative loosening of Volcker rule, anything of that nature, that’s out the window.”

(emphasis added)



Jamie Dimon with new facial decoration



Bloomberg then points out that the unit's job apparently was altered from engaging in mere hedging activity to becoming a proprietary trading unit with the express  purpose of producing trading profits:


“The chief investment office’s push into risk-taking was led by Achilles Macris, 50, according to three former employees, Bloomberg News reported on April 13. He was hired in 2006 as its top executive in London and led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York-based bank, they said. Dimon closely supervised the transition from its previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

“I wouldn’t call it ‘more aggressive,’ I would call it ‘better,’” Dimon told analysts yesterday. “We added different types of people, talented people and stuff like that.” Until recently, they were careful and successful, he said.

“It’s classic Wall Street hubris, which we’ve seen so many times before,” said Simon Johnson, a former chief economist at the International Monetary Fund who now teaches at the Massachusetts Institute of Technology. “What’s particularly ironic here is that Jamie presents himself, and is believed by others to be, the king of risk management.”

Bloomberg News first reported April 5 that London-based JPMorgan trader Bruno Iksil had amassed positions linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market.

The $2 billion loss occurred in London under multiple traders, according to an executive at the bank, who spoke on the condition of anonymity. Dimon wasn’t immediately told about their shift in strategy and didn’t know the magnitude of the losses until after the company reported earnings (JPM) April 13, the executive said.  As the position deteriorated rapidly, the bank gathered internal analysts and examiners to investigate, and Dimon grew more distressed by the day, the executive said.


We could probably state at this point that the once 'vaporized' MF Global customer funds have now been vaporized a second time.


The Shadow Banking Malaise

What is important about all this is however actually not the loss as such, or the well-deserved embarrassment it has created for Mr. Dimon. What is important is that for one thing, it is a reminder to investors how opaque and risky the world of otc derivatives trading is, and that financial institutions all over the world have numerous potential time bombs lurking in their portfolios which are difficult to track even for the banks themselves.

For outside investors it is simply impossible to gauge what the risks really are. Consider from the Bloomberg report above that Dimon was hitherto portrayed as the 'king of risk control'.

If even the 'king of risk control' can quickly drop $2 billion in derivatives losses, then what are the chances that his presumably lesser peers will do likewise or worse?

Secondly, London is the global center of the so-called 'shadow banking system', where the banks hypothecate and re-hypothecate customer assets in exchange for liquidity and funding that they  can then use for their own investment and trading purposes.

This is essentially what MF Global did: it used customer assets as collateral in the repo market to obtain funding for risky trades on its own account.

Mr. John 'I knew absolutely nothing about it and what I might have known I have forgotten' Corzine, one of the president's chief fund-raisers (and hence apparently untouchable) was the instigator of these risky and highly leveraged trades. He evidently overestimated his own trading prowess, as he bought sovereign bonds of some of the worst issuers in the euro area which promptly imploded.

If a big force like JP Morgan's CIO were to disappear from the London market, then it would not be too surprising if liquidity in the shadow banking system took a big hit it would be difficult to recover from.

The fact that the CIO's loss will crimp the bank's lobbying efforts on behalf of weakening the 'Volcker Rule' plays right into the deflationary pressures that the markets have been exerting since the 2008 crisis, and which have only been held at bay be means of copious money printing on the part of central banks.

This is the aspect investors must carefully ponder. We may not see the effects fully percolate through the system until later this year, but as Marc Faber reminded everyone yesterday, the chances for a market crash at some point this year have vastly increased on both technical and fundamental grounds.

A loss of liquidity in the shadow banking system that progressively worsens as time passes would certainly fit in with this forecast.



The real 'whale' is the shadow banking system – similar to an iceberg, we only ever see its tip.




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8 Responses to “Whale of London Speared”

  • Andyc:

    Note again that in April when the stories first hit about Iksil and this trade the same group of blogs and bloggers were already predicting a disaster over it

    Well that didn’t take long!

    Maybe various risk teams at the Fail Too Bigs should read Pater or zero hedge or Mish and the like, then they might have a clue what is going on.

    : )

    • The minute it was clear that Iksil had ‘become the market’ it was also clear that he would fail. In fact, it was extremely amateurish of Dimon to ignore and wave off this information, as every risk manager knows that becoming the sole trader on one side of the market is a recipe for certain disaster. Amaranth is indeed a great example for that, and there have been many others throughout history.
      Not surprisingly, hedge funds were very eager to take the other side of JPM’s trades.

  • Andyc:

    The quotes from 0man over this latest blunder at JPM are comical to say the least, not that they are funny, sometimes comedy is not funny.

    That sounds as circular and as convoluted as 0mans logic here about JPM, I know but I thought it was funny funny as opposed to not funny funny, so I said it, besides my saying it doesn’t cost anyone 2 billion dollars and counting so why not.


  • amun1:

    We had one chance four years ago to escape this monetary madness with something on the order of a second great depression. Politicians knew it would end their careers en masse, so they abandoned common sense and listened to short sighted patrons who assured them that we could finally turn paper into wealth, water into wine . They chose to let the central bankers “stimulate” economies into growing faster than the debt could accumulate because, apparently, 50 years of empirical failure was insufficient evidence. We just never had the perfect mix of central planners to set us free from the suffocating cocoon of debt, until now, .

    So now we’ve quantitatively eased our way into the light of day, and find that our banking system is so concentrated, governments so dependent on financial legerdemain, savings so depleted, financial assets so manipulated and derivatized, and central banks so over-extended, that our economic flexibility is akin to a butterfly in the path of a class five hurricane. It doesn’t require a careening JP Morgan or Euro-debacle to break our wings, even though plenty of that heavy matter is flying about. In this storm, something simple will suffice; maybe an innocuous statement by a faceless bureaucrat or a third world peasant who loses faith in the system. Even the smallest straw becomes a deadly projectile when driven by the gales of unpayable systemic debt.

  • Doug Noland has a little comment on this trade. He seems to think it is a risk on trade and the market is moving rapidly to risk off. To lose $2 billion, especially if it is supposed to be a hedge, which I doubt (Texas hedge, short default swaps, long Spanish debt), implies a huge position. To get off such a position involves a huge counter position. This is like a snake trying to swallow its tail or using a hammer to cure a head ache. The Amaranth trade is a good example, a clear corner that collapsed. I believe there are more around the world. Noland said the hedges went heavy into commodities, which have moved against them. A recession will be a bloody financial event. WE666, I will watch the film.

  • worldend666:

    For your viewing pleasure. If you have not seen this film then you absolutely must:


    Margin Call

    Follows the key people at an investment bank, over a 24-hour period, during the early stages of the financial crisis.

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