Today after the markets closed, JP Morgan called an emergency investor conference call to announce that it was caught holding short credit default swaps. These are the same toxic assets that almost brought AIG down in 2008, if not for a last minute govt bailout. JPM has lost $2billon in the last 6 weeks, with about another estimated billion in the coming weeks (minus income from CDS premiums). They say they will not buy back the short positions but will take the hit as it comes. However, this will bring down the share price of the entire US banking sector tomorrow. As I write, Asian markets are pulling back. The question is whether the sell-off will continue or not.So far JPM is saying that it was a lone rogue trader and that this is not systemic as 2008 was. Interestingly, the traders on the floor have snickered about a "London Whale" over the last weeks who was 'shorting' these assets to everyone and who apparently had access to very deep pockets (likely fired now). Now that JPM is publicly exposed, you can expect the vultures in the credit markets to pick the bones clean. As such, others who are over exposed will likely be made public as the market corrects, as it did in 2008.
I happened to be on the right side of this news as I was shorting the US banking sector. However, it seems that there was a trader that bought 13,000 put options on JPM today before markets closed set to expire Friday. This insanely risky trade, as it turns out, will net the trader about $2.6 million in profit in one day (and likely an SEC investigation).
Disclosure: I'm short gold, US banks, energy stocks. Also, this story is still breaking and facts are still emerging.
Lots more on JPM at Zerohedge, as you might expect.
Although I agree with the author about being short the US banking sector (the pain is not over yet), I would never short gold or energy. Perhaps if your trading window was near term. Otherwise, look at the big picture, buy on the dips and for God's sake keep some of your precious metals in the physical form.
People will sometimes look at the advice to have physical precious metals as a tinfoil-hat wearing wingnuttiness. However, I used to know a Somalian woman who's father was a merchant. When that country fell apart it was fast and brutal. The family had a few gold coins and jewelry that got them out. The rest was left behind.
When are the regulators going to learn and prevent consumer banks from essentially gambling? When consumer banks fail, the temptation to bail them out is too great because of the number of people affected.
Actually it's probably not very much. JP Morgan is a 2.2 trillion dollar bank with $280 billion in shareholder equity. $3 billion in losses is not that much for a one-time writedown.
I'm short OF gold. In fact, I'm short of anything of value. Now that's disclosure!
Yet S&P says (Friday AM) JPM is a "buy".
And how much do you want to bet that nearly every last person that works at JPM is a supporter of the Democrats.
Just to clarify, I am long-term bullish on gold, and I am only shorting it with a window of a few weeks which is turning out to be profitable so far. Energy prices and the associated stocks will pull back on global economic slowdown, as we are witnessing in China. The exception I would make would be uranium, which I am bullish on, and I hold stock in Cameco.
Gus - "short of gold", good one
the bottom should be in for the metals,
although they love to create downdraft and spook the weak hands
physical is the place you wanna be
is it okay to wear tinfoil after may 1?
Not sure the guys at JPMorgan understand the concept of "hedging risk". If that was what they were doing then their underlying position(s) should have increased. This wasn't hedging risk, it was gambling, which would be fine (I'm not a shareholder) if we didn't ahve to bail them out with our tax dollars when it goes wrong.
A bank was allowed lose money? There's hope for the world yet!
Un-flippin-believeable. Can we expect all those MBA's that are really really smart to pull a stunt like this every 4 years or so.
When you're subsidized by the government, you can keep doing stupid things as long as you want.
Shorting gold is a gutsy move .....considering that it's been up every year for the past 10 years.
The loss by JPM isn't nearly as important as what caused it. JPM is huge, the loss is minuscule (if it doesn't happen all the time), they are not not getting bailed out (and did not get bailed out last time - Treasury forced TARP on them), and CDS are not "toxic" per se.
They most likely lost on their positions because CDS spreads were widening while bond spreads were not. Or, rather, bond spreads did not fall. This tells us that the bond market still has a lot of risk priced in. The recent news of recovery losing steam has been shown by the debt markets and Dimon closed his positions at a loss to prevent further losses.
I'm not saying the economy is in danger of a double dip, but a weakening of the recovery is apparent. The government spending is gone. One-off investment decisions have been made. The long strange trip has begun.
There is no safe haven.
"derivatives" remember that word - it will be the last thing your banker says to you before your savings are savaged by the state bailing out the economic system.
Excellent comment, Reginald, every bit of it. I would only add that the economic recovery this year and part of last year in the US was driven in large part by durables. That can't last, and it's already tailing off. And in an election year with so much at stake, there's even more reason for corporations to hold off on big investments.
Added to that, US housing markets are still in the tank with no real sign of recovery. More evidence to support your notion that the recovery is at least losing steam. Add to it a credit crisis in Europe if any of those countries goes over the edge into default and that will probably do it.
When it comes to "hot tips' on where the market is going only two things are for sure;
1) nothing! is for sure.
2) free advice is worth just that.(free = zero)
People who freely spout their opinions and hot tips should be taken with a grain of salt. The ones who have a good track record and know of what they talk about ... well, just try and get their opinion out of them. Crow bar needed.
A favorite trick - hey, look out tomorrow, but I am ok I am short short. If market goes up instead - hey I was only short temporarily now I am long. Try taking it to the bank.
And do I think CDS and derivatives and all that could blow up again... sure do. The best way to protect oneself .... not a clue other than diversifying.
I am into precious metals too, but mine are brass, lead, copper, and smokeless powder.
You watch. They will get a bailout because they are the owners of the US in truth, and the politicians will make sure to take care of their owners.
To quote Ross Perot, "I hear a giant sucking sound", as money is taken from the people to feed the reckless banker elite.
On the upside, this might be the last straw of any chance of a Obama 2nd term. We can only hope, although Romney isn't much better.
@CGH
Yes, that's exactly what I meant by "one off investment" - durable goods.
Planes, trains, automobiles, computers- manufacturing has had a good run in the past year, but everyone who wanted to buy durables has already done so. With interest rates so low, it's not surprising there has been investment in durables.
Housing, the other durable meat, isn't recovering any time soon. Investors can make money in distressed assets, but there's lots of risk there. The housing market is still not stable.
There's little else for the economy to feed upon. Again, I'm not doomsaying here, just predicting what we already knew - a long, slow recovery.
We're looking at about five years of low returns. If your investment horizon is much longer than that, you're probably OK. If it's not, you're in trouble.
Ron is right that diversification is the only viable strategy right now. There is no magic asset to protect us here. There is no option, future, or swap that pays off in a flat market (or one that moves with expectations). Any position is a gambling position, and you might as well play craps or a roulette wheel.
I should say that the only people who will win without risk are those who sell options, futures, and swaps to others who are betting that assets will go one way or another - they get fee income.
When the sh1t hit the fan 4 years ago, no one cleaned the blades and pieces are still flying off. The big banks are still sitting on untold billions in toxic assets spread throughout the trading world and mum is the word. I would love to know how many liabilities are still shown on paper as assets. I would hazard a guess we will find out after the next election, but only if Obama is turfed out.
A credit default swap is a fancy name for an insurance policy taken out by a bond holder to protect them against the bond becoming worthless. I assume there are a lot of bonds becoming worthless and as a result JPM is having to pay out to the policy holders. I may be being naive, but this should be an issue between buyer and seller and have no effect on anyone else in any way. If JPM goes bankrupt their share holders loose there equity, like I have done in investments in the past and anyone who was stupid enough to lend them money will loose there money. It happens all the time and the world keeps turning. To big to fail is BS spouted by people trying to get someone else to bail them out.
minuteman I believe the trade here was short selling CDS, expecting that they would tank. In other words this was a bullish move on bonds. I'm assuming these were CDS on european bonds that of course went up in value after they elected socialists in Greece and France. Why anyone would be bullish on bonds is beyond me.
Do I understand this correctly?
JPM had a hedge fund that was supposed to offset some of the risk in their credit assets, and somebody (this "London Whale" entity) was shorting the bejesus out of their hedge, which caused the price to drop and JPM now has to eat the loss? Is that what happened here?
No Edward Teach, this was a trader at JPM shorting credit default swaps, betting on a bond market rally.
Jpm manages over two trillion in assets. Knowing that should make us all sleep a little easier.
The best comment from ZeroHedge:
"So... another $2.1 billion just got Corzined? Little by little, these are adding up. "
Exactly. But since Obama ratified " too big to fail " as his admin's official policy, JPM and the rest of Wall Street can cavort in the financial markets, secure in the knowledge that their man Barry or their man Bernanke will bail them out.
None of you posters and I include myself, have a hot clue as where stocks or commodities are going, so stop with the predictions. JPM is like any other public corporation in that it has an obligation to its shareholders to perform one obligation, "make money for its shareholders" In order to do that the bank has to take risk, make bets on a number of martket trends, interest rate direction, currency fluctuations and the like. If you want to ensure that banks never lose money, then stop them from taking deposits, lending money, borowing from the fed and hedging thier risk on other investments.
@ one guys opinion at May 11, 2012 9:45 PM
"
where stocks or commodities are going, so stop with the predictions".
This is true as we find out when it crashes and it's too late. JPM just lost over 2 billion which may seem insignificant to them, but a billion here and a billion there and pretty soon you are talking about real money. The stock market today is lightyears from what it was intended to be. If there are two flys on the wall you can probably buy shares on which one will fly first. There is so much junk in the system that has no value except to speculators and hedge fund managers that the whole system seems more geared to enriching internal gamblers than investors. The genesis of the stock market was to buy into tangible assets or promising upstart companies. Today upstart companies find it almost impossible to even get a loan. Wall street and the big banks are now exclusive clubs that can easily leave a trail of devastation and still be immune from repercussion. Name the people that went to jail over toxic assets! Our whole capitalistic system is based on the stock market and fairness of the big banks. It's what they don't tell us that erodes the confidence essential to our way of life. Only 2 billion, but how many more 2 billions are they sitting on due to speculation instead of something tangible? The system needs a shakeup that will unfortunately be forced on them, but we will probably have to wait for a few more crashes or a government that looks at the books and says "WTF have you guys been up to".
This is only my opinion and I look forward to being corrected because my faith in the system really needs a boost.
No, y'all don't understand what JPM was doing, and simplifying CDS to an "insurance policy" is oversimplifying it.
CDS pay out for a credit "event." The "event" could be a default, a downgrade, or changes in the spread. It appears that the CDS losses were from trades against the spread.
In theory, a hedge should have an offsetting position. The problem is that there is "basis risk" where the value of the hedge and the value of the underlying part ways. This seems to be what happened with JPM.
We don't know whether this was speculation gone wrong or a hedge gone wrong because we don't know what JPM's other positions were. Ironically, by closing out their positions at a loss, they leave the initial position unprotected from risk.
CDS are not "toxic" assets. They are risky, but the alternative is having no way to mitigate default risk. That risk would have to be priced into the underlying.