Posts filed under “Derivatives”

“Everything is a Hedge”

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.

Category: Bailouts, Derivatives, Regulation, Trading

Kopecki: JPMorgan Loss May Be `Tip of Iceberg’

Bloomberg’s Dawn Kopecki talks about JPMorgan Chase & Co.’s $2 billion trading loss after what Chief Executive Officer Jamie Dimon calls an “egregious” failure in the firm’s chief investment office. Kopecki speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InsideTrack.”

Source: Bloomberg, May 11 2012

Category: Bailouts, Derivatives, Trading, Video

CDS and Synthetic CDOs Explained

Nationally renowned forensic accounting expert, Thomas A. Myers, explains the fundamentals of credit defaults swaps and synthetic CDOs (collateralized debt obligations). These structured finance products were at the heart of the market meltdown, and were the building blocks of numerous allegedly fraudulent transactions, including the Goldman Sachs ABACUS deal, a transaction that caused the SEC to take significant action.

Via The Trader

For more information on the Goldman ABACUS deal, including an overview of the alleged fraud, visit the T.A. Myers & Co. website:

Category: Derivatives, Video

Neil Barofksy on JPMorgan Trading Loss, Regulation


One of the Biggest Trading Losses in History

Category: Derivatives, Regulation, Video

Fill ‘er Up — with Unregulated!

Abstruse Goose: Fill it up with unregulated:   Abstruse Goose

Category: Derivatives, Humor, Regulation

9 Biggest Banks = $228.72 Trillion in Derivative Exposure

Via Demonocracy, we see this basic take on derivatives: A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. Ex- A derivative buys you the option (but not obligation) to buy oil in 6 months for today’s…Read More

Category: Derivatives, Digital Media, Regulation

Barry Ritholtz Washington Post March 10 2012 ~~~ Last week, Greece officially defaulted on its debt. (Unofficially, it defaulted long ago.) This formal default on about $100 billion triggered payment of $3 billion in credit-default swaps. These are the non-insurance insurance products that pay off in the event of a default.Let’s take a closer look…Read More

Category: Apprenticed Investor, Derivatives, Regulation

Final Thoughts on GS Controversy

I just did a phoner on Bloomberg TV on Goldie, and I suspect this meme has just about run its viral course. To me, the key takeaways are as follows: • Publicly Traded Banks: When firms shifted from Partnerships to publicly traded banks, their priorities changed. • Profits First: Meeting quarterly profit estimates became job…Read More

Category: Corporate Management, Derivatives, Media

Credit-default swaps are masquerading as financial products

> My Sunday Washington Post Business Section column is out. This morning, we look at CDS — how they became such a dangerous aspect of the financial firmament. The print version had the full headline Credit-default swaps are masquerading as financial products. They should be regulated as insurance products. (The online version is merely Credit…Read More

Category: Apprenticed Investor, Bailouts, Derivatives

When is a Debt Default not a “Credit Event?”

In this week’s Barron’s, Alan Abelson looks askance at the non-default default in Greece. All bombast aside, what makes this issue so fascinating to me is not whether or not Greece has or has not technically defaulted. Rather, it is that there is a committee of conflicted interested parties rendering a verdict on that issue….Read More

Category: Bailouts, Credit, Derivatives