The claim is being made that JP Morgan's $2 billion trading loss was in a trade that was a "a hedge." It doesn't take much review to easily disprove that position.
We first learned of this particular trade when they began to distort credit indices. Any trade so huge that it impacts its markets "“ that becomes the market "“ cannot be credibly thought of as a hedge. Simply stated, once you are the market, you are no longer a hedge. Sheer size of this trade makes it far more accurate to describe this as speculation than hedge.
Of course, the loss was the tell. A true hedge would have been offset by the underlying position that was being hedged — so any loss should have been insignificant. Even a minor correlation error should not lead to a $2 billion dollar hit.
Which begs the question, what is a hedge? It is a position taken in order to curb the risk of a specific (or arguably general) trade. This is not a new concept: The word "Hedge" has been used as a verb in English since at least the 16th century (See Shakespeare’s Merry Wives of Windsor).
Looking at the question a little differently, what isn't a hedge? There is always the other side of the trade, and that side (if not position) is what you can theoretically claim to be hedging. Hence, for a huge bank with trillions on its book, there is the rationale that any trade, any position, any financial transaction, is potentially a hedge against some other position the bank is holding. Recall that Goldman Sachs, who has been rather silent on the JPM trade, used the same logic when arguing they were not betting against clients; rather they were “hedging other bank positions.”
Poppycock. Both the JPM and GS arguments fail, for a simple reason: If we are going to define this trade as a hedge, then there is no other conclusion to reach except that everything at a huge bank is a hedge.
And once you define everything as a hedge, well then, nothing is a hedge.
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
What the CIO office , as Bloomberg pointed out was not a hedge in the way FASB hedge accounting would permit. To say it’s a macro hedge makes anything a hedge and when you look at the size and scope of positions, it makes the claim laughable.
It may be true that the price of ausie dollars in Japanese Yen correlates well with the S&P 500 but if a bank were to tell me that a currency swap was hedging a stock portfolio.. Well I’m from Missouri…
Few things are not lost on me, First that this unit operated out of London, which seems to be the favorite locale for companies up to mischief(AIG?) and secondly often firms will set up small hedge operations, and over time these turn out to be profit centers and the mission changes from hedging to taking on risk. Lastly, defenders of JP Morgan keep pointing out that two billion was small in the context of JP Morgan’s balance sheet, but these same people fail to admit that this loss occured at a relatively benign time and it could have been a lot worse.
Sheila Bair, Thomas Hoenig and Chris Whalen are again pointing out that these banks are simply too big and if we created seperate legal entities(back to Glass Stegall) between the commercial entities and the investment banking entities we would not be exposing the Tax Payer and extending subsidized financing for what is non-commercial essential banking activities.
Lastly, The Fed had an indirect role in this. By engaging in ZIRP the gov’t has killed bank NIM and effectively made non-economic bank carry and the business of lending securities.
Once a “hedge” grows beyond a certain size, it becomes less of a flotation vest and more of a suicide vest …
Interesting interview with Prez of Toronto Dominion on Bloomberg. Basically he advocated more capital and banks “sticking to their knitting.” As banks grow in size they take on risks that are different from those “knitting.” Markets multiply and become so numerous they may not be able to understand their risk. What the housing crash showed is that lenders engaged in securitizing were seemingly blind to the effect of many lenders pumping out the same stuff. It reminds me of an incident when I was a kid. A local tour boat almost capsized because, on a very hot day, first a few, then ALL passengers on the boat moved to the side in shade. Each individual’s decision made sense given their overheated condition and was not, they thought, of any risk. But, in aggregate, the crowd’s action almost overturned the boat. This is why regulations and limitations are needed. Otherwise there is nothing to prevent a number of systemically important banks from making simulataneously what seems to them to be individual ordinarily risky actions and capsizing the financial boat.
[sigh] … the Glass-Steagall Act was such a marvel of simplicity and elegance, and would have severely impeded, if not blocked entirely, nonsense such as what we now observe daily. We will likely never again see the unlikely combination of desperate and competent legislators arise to produce anything similar. It exceeded even the US Constitution as an legal instrument that pointed us toward a better tomorrow (albeit in a much narrower context).
[...] Barry: "Everything is a hedge." (TBP) [...]
heres a gross understatment this is a complex question
1 a hedge could move a small illiquid market and still be a genuine hedge pass maybe 2 any hedge losses must be offset by gains elsewhere-you have neutralized the position -fail 3 any hedge generates hedge accounting treatment gains and losses that are not separately taxable– dont know— probably fail any hedge position must have a a defined hedgeable offset expected to behave opposite but equal—- fail 4 to me even if you have a hedgeable right, if you are applying it conditionally or partly, or only if you like the market you are speculating–a massive grey area obviously fail here 5 you could bankrupt youself doing this– hedging/ losing/ covering/ rehedging– i saw a couple of customers do this. BPs “Hedging” spec shop blowup inthe 80s was like this
if only you buy side guys knew how the sausage was made!!! i invented a structured product to get non marked hedge treatment for hedging future earnings which was not allowed then we also helped Abbott Labs manage their annual earnings growth to a compound 15.0% per year. meaning not 14.9% and not 15.1%. 15 F ING %!!!. maybe some old timers remember?
Right.. just like Financial Innovation, Arbitrage, Mark-to-Market, Value at Risk, Capital Ratios, Stress Tests, Risk Management.. the lexicon used by the banksters is all meant to obscure the real motive of the industry. BONUS POOL. Everything they do has one purpose… maximize short term profits. This is what their Compensation Scheme is aligned to.
this is how nonfinancial corporate treasurers and CFOs misuse their time and occasionally bankrupt their company. “hedging” it is a substantial source of financial sector profits. in this case. Bilaterally it is a onesided zero sum game. bank wins you lose
this is a case apparently of the predator fooling itself, i really would expect better of JPM for its own account we will see if there are any bonus clawbacks for the ” lady” in question
moss of course is right and for the nonfinancial treasurers too this lets tem get in on the wall st bonus fake profits game i run a hedging shop this hedge oh that was my great trade that loser over there? that was a hedge!!! OMG look at that P/L!!!
Focus on the word: http://financial-dictionary.thefreedictionary.com/Hedge http://www.investopedia.com/terms/h/hedge.asp#axzz1uqcCNt6s They are bets. Bets have winners and they have losers. Who has the money? The winner. There is always an interesting story about the winner…where is it here?
Yawn. Another day another “too-bit-to-fail” fiasco. It’s all getting a bit tedious, especially the part where nobody ends up being taken behind the woodshed.
On CNBC, when Prof. Michael Greenberger stated that JPMorgan’s trade was not a hedge, four CNBC hosts and “contributors,” plus the president SIFMA, piled on to him, claiming that he did not know what he was talking about. http://video.cnbc.com/gallery/?video=3000089838&play=1
It’s not possible that CNBC is biased against anyone who challenges the veracity of the banks, is it?
Why is Dimon still on the NY Fed board?
http://www.politico.com/news/stories/0512/76265.html
The offset to most so-called hedges are mounting levels of leverage–not just a single level of debt at the bank, but mounting layer after layer of “debt” obligations on the top. And when the asset value is surpassed by the leverage the deal collapses.
2008-2009 showed that many of the hedges, including CDS’s, were only hedges to the extent that the United States government was willing to stand behind and guarantee the insitutions issuing them.
A true hedge is when a counter-party will be able to payoff when your insurance is needed because your primary position is taking a large loss. 2008-2009 showed that the so-called counter-parties are all in the same game overall. They all are going under at the very moment when you need your hedge-proviiding counter-party to be solvent. The fact that their position had grown to the point it was distorting the markets meant that the counter-parties may not be there if they really had to pay-off big.
Apparently, $2 billion rounds to zero at JPM also.
Dimon: “…There is almost no excuse for it…”
Now that is a hedge.
Which begs the question, what is a hedge? It is a position taken in order to curb the risk of a specific (or arguably general) trade. This is not a new concept: The word "Hedge" has been used as a verb in English since at least the 16th century (See Shakespeare's Merry Wives of Windsor).
As long as we are in instructive mode… Begging the question is a fallacy of circular argument. Should read “raises the question”
HEY DIMON
JUMP YOU FUCKER
Been around points out that not only CNBC but SIFMA the securities industry spokesman doesnt know and doesnt want to know, they are in some respects the worst i spoke to a mixed group of central bankers, sell side, and buy side and suggested major accounting flaws, in particular the related prices for an individual deal dont match the sell side and most central bankers got it immediately most of the buy side said impossible! how can that be! prove that? willful ignorance i say.
And even with this fail the stock has only moved from 41-36. Where is the action being taken by share holders?
It is easy to be results based and everyone – BR included – needs to try not to be.
I would agree being too huge in a market to the point that there is no other side is just dumb etc etc. This is so basic it seems shocking that the mistake was made. It does happen though and no having a threat of a PB pulling your line seems to make it happen more often.
Yes everything is a “hedge” – this is political/pr speech and not a white paper.
It is not a hedge because it worked! It is a hedge based on the purpose for it. There are no perfect hedges (unless we are looking in a Japanese garden). All hedges have a risk of failure, adding risk through basis, and magnifying losses. It happens.
JPM has a ridiculous balance sheet and losses are going to happen. Large losses are going happen. Taking on risk does not equal a positive return. Taking on risk equals the expectation of a positive return.
All that said – it is incredibly dumb to put that huge of a trade on into that market.
Do any of you really think Congress will get anything restricting business last the Roberts Court? Cm on, you voted for the Bushes and Reagan, you are getting what you wanted, a court that will take the reins off anything and everything.
Do you think Dimon used the word ‘hedge’ deliberately in order to mislead?
Dimon just another evil banker wrapped by a facade of "Responsible Manager of Capitalism".
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