A plain-English summary of JPMorgan’s $2b trading loss, for people who don’t speak the language Banker.
1. This article mis-states residual risk of loss at $1B. This is false - real exposure is materially higher.
2. Bruno Iksil’s trades are only part of the issue.
3. JP Morgan did not unwind the bet because it was flawed - at first. FAILURE TO IDENTIFY CAUSE AND EFFECT IS A CRUCIAL FLAW IN THIS PIECE. They unwound it to reduce their hedge because of improvements in the hedged instruments. It was at this point that the trap in selling the index became clear.
4. It is materially false to state that the best hedge for high-yield corporates is highly-rated corporates. This is both subjective and wrong.
5. Iksil’s bet was reported as $200B, not $100B.
6. The bet in no way represents a position that bonds in JP Morgan’s inventory would “never default”. In fact the opposite is true. Intent is never clear with debt - in fact it could be anticipated that Iksil’s assumption was that higher yields in safer debt would make up for principal loss in the core HY portfolio.
7. Bets against Iksil’s position did not assume he was “overconfident”. They presumes his bets were so large that the nature of the market had been fundamentally changed. He poured so much money into the position that the size of the market changed. JP Morgan does the same fucking thing with the market for SLV, allegedly, which I would believe without hesitation.
8. We can’t differentiate hedges from prop bets because of a fundamental problem with the logic behind the Volcker Rule. Namely: EVERY POSITION YOU TAKE IN FINANCE IS DIRECTIONAL. Iksil’s bets were “delta neutral” on paper, as far as I’ve heard. But a sufficiently large “delta neutral” bet is only delta-neutral if you trade with a perfect, rational market, which is not something that exists outside of computers or Washington.
9. There is no evidence that depository funds were wagered in this bet or that this bet in any way impaired JPM’s ability to function as a commercial bank.
Re-blogging for anyone who does speak Banker fluently. I’ve been reading/writing about this news since 4am and so my brain hurts.