The Shadow Darkens Over Investment Bank JP Morgan

US investment bank JP Morgan has dusted $2 billion on synthetic derivative positions since March 31. According to the company, the Chief Investment Office’s ‘hedging’ strategy gone wrong will result in a net income loss of around $800 million for the corporate division.

Back in April, Bloomberg reported that:

‘JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon has transformed the bank’s chief investment office in the past five years, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes.

‘Achilles Macris, hired in 2006 as the CIO’s top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York-based bank, three of the former employees said. Dimon, 56, closely supervised the shift from the CIO’s previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

‘Some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms.’

‘Former employees’ are a great source of information. Their version of events is usually much closer to the truth than the official line trotted out in conference calls. JP Morgan says the role of the Chief Investment Office (the unit responsible for the losses) was to hedge the banks positions. That is, reduce risk. Commenting on the loss, the bank said:

‘This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed.’

But the hedging explanation doesn’t stack up. There’s much more to this story than meets the eye. When Bloomberg broke the story of JP Morgan’s huge derivative exposure back in April, the bank panicked. Here’s what Bloomberg said back in April:

‘Bruno Iksil, a London-based trader in Macris’s group,’ (Macris is the head of the bank’s Chief Investment Office – Ed) ‘gained attention last week after moving markets with his trades, drawing a comparison to Federal Reserve Chairman Ben S. Bernanke’s power in the government-bond market.

“What Bernanke is to the Treasury market, Iksil is to the derivatives market,” Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP in Los Angeles said…’

It appears that JP Morgan subsequently tried to de-risk the portfolio, with disastrous consequences. Also, volatility has picked up recently, which has probably made matters worse.

The much more likely explanation is that JP Morgan’s ‘Chief Investment Office’ is (or more likely was) a proprietary trading desk for the company. In other words, it punted shareholder funds on derivatives to boost profits. Or maybe it wasn’t using shareholder funds at all…?

All the action occurred out of the London office.

Why London?

London is the place to be if you want to use other people’s money to make money for yourself. Remember MF Global? The source of its problems and the reason behind its eventual bankruptcy stemmed from MF Global’s London office.

How do you use others people’s money for your own benefit? The process is known as  ‘re-hypothecation’, and London is the centre of the universe for re-hypothecated trades.

According to Wikipedia:

‘Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker’s own trades and borrowing.

‘In the UK, there is no limit on the amount of client assets that can be rehypothecated, except if the client has negotiated an agreement with their broker that includes a limit or prohibition.’

That all sounds a bit heavy for a Friday. But there is something going on here. JP Morgan’s operations straddle the world of banking…and the far murkier world of ‘shadow banking’. Shadow banking is where investment banks, hedge funds, leverage, repos and hypothecated assets all come out to play.

We don’t pretend to understand it all. But it’s crucially important to the global economy. We’ll be digging deeper into the issue in the weeks to come. Stay tuned…


Greg Canavan

for Markets and Money 

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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6 Comments on "The Shadow Darkens Over Investment Bank JP Morgan"

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Nobody ever before with anything near the size of these positions that were called in the market, and then unwound under duress, could possibly miss by this small a margin. Nick the Baring wonderboy’s positions were miniscule in comparison. More to come surely …


None of the reports about this have yet discussed how this will be put on the US taxpayer.

Cruising Condor

This is petty cash for JPM. It will be business as usual from next week. They are surely playing with others money as they have always been.

Hmmm JP Morgan is still a US based bank. As such all of this sounds a lot like plain old fashion fraud and theft to me. Instead of giving one thin dime of mny money we should be treating the entire senior management staff at JP Morgan as a terrorist cell. They should be hunted down and arrested (or shot if they resist just like we have done to so many innocent Muslims) And they should have a very public (but short trial) the charge economic terrorism and crimes against humanity. After they are found guilt they should be very… Read more »

After reading many news stories about JPM’s recent losses, it occurs to me that the $2B figure quoted by JPM has zero proof backing it up. How do we know that it is not $20B or $200B or more? Are we supposed to trust JPM to give us the facts on this issue? I suppose that we could. After all, there IS a 1st time for everything.


Damn it,…. there goes the bonus.

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