Didn’t realize that the Thames in London could hold whales – but apparently it does (really! pic attached :). Jokes apart, the big news in the financial world came last Thursday when J.P. Morgan boss Jamie Dimon announced that his firm has lost $2 Billion due to a rogue trader in their London offices simply known as the “London Whale”. Apparently, the loss was incurred when the Whale put on a trade to hedge JPM’s credit risk. Now the hedge has gone awry, and the worst part is the story is not over yet. JPM is unable to get out of this trade now, as there are no counterparties to take the other side to close out this trade. Everyone knows this is toxic crap, and nobody wants to touch it with a bargepole. JPM expects further losses in the coming quarter from this trade. And as usual, nobody knows exactly what this trade is – because these derivatives are unregulated in an opaque market. Unless you’re on the other side of this trade, there is no way to know what the Whale did. Boy, do these guys give derivatives a bad name…
What is amazing is that this trade was supposed to be a hedge to JPM’s existing credit portfolio. That means the hedge is supposed to gain in value if JPM’s credit portfolio sours, and vice versa. By an equal amount. At least that’s what a perfect hedge is supposed to be. How can a hedge go so badly wrong ? Did the Whale “over-hedge” by a factor of 10 or 100 ? Possible. Or did the credit portfolio do so well that the hedge is losing so much money now ? We think not. Or does Dimon’s team don’t really know how to hedge a portfolio ? Aha..
It seems like this is just another example of wild speculation by big Wall Street banks on the Fed’s (our) money and Dimon is simply cloaking his comments to get off the hot seat. On the other hand, maybe the JPM team do need to learn how to effectively hedge a portfolio. No disrespect Mr. Dimon, we think your team could use a few courses on perfect hedging here at OptionTiger. We know things are tough right now, so we’ll make sure to provide an attractive corporate discount.
See full article on Bloomberg –