Counterparties: Should we fear Voldemort?

April 9, 2012

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Yes, a billion dollars is cool. But what about a team led by a mysterious trader nicknamed “Voldemort” making potentially market-distorting bets at the nation’s largest bank by assets? That’s really cool.

In Bruno Iksil, a JPMorgan trader also known as the “white whale,” Paul Volcker – and the regulation that bears his name – finally has the nemesis he deserves.

Bloomberg reported on Iksil last week, noting that he reportedly earned $100 million a year for the bank in recent years, which has rival traders claiming that Iksil’s bets could violate the Volcker Rule. The WSJ also wrote a piece on Iksil. Additional details and an improved pseudonym in a follow-up by Bloomberg vaulted him back into the headlines today:

JPMorgan Chase & Co. (JPM) trader Bruno Iksil’s outsized bets in credit derivatives are drawing attention to a little-known division that invests the company’s reserves and fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money.

Iksil’s influence in the market has spurred some counterparts to dub him Voldemort, after the Harry Potter villain. He works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money.

Lisa Pollack tries to unpack two crucial pieces of this story, the motivations of the sources and whether indeed Iksil is distorting the CDS market in question. Sober Look argues that the most likely scenario is that JPMorgan is hedging its exposure to its own debt, rather than setting up a proprietary trade, which would be banned under the Volcker Rule.

It’s a bit ironic that it was initially a small group of hedge fund traders who complained to the media about how Iksil’s trades were warping the free market.

But however market-distorting, it does seem likely that the trades are hedges, albeit massive and increasingly public ones. These are probably trades JPMorgan’s rivals in this particular CDS market just don’t like being on the other side of.

If the facts of the trades as now reported are true, we’re left with the same uncertainty regarding the Volcker Rule that we’ve had since it was proposed. How much harm does prop trading by deposit-taking institutions cause to the global financial system? How do you define prop trading? How do you enforce a ban on it? When does a hedge become a systemic risk?

To help think through these questions, we put together the best pieces on the still vague and hotly contested Volcker Rule:

We need a new Volcker rule for banks (Sheila Bair)
The Volcker Rule and ‘Flipping the Presumption’ (Economics of Contempt)
Financial Reform (Unfinished Business)
Attack on Volcker Rule Seen Exaggerating Cost of Disorder (Businessweek)
The Volcker Rule, Made Bloated and Weak (Jesse Essinger)
The Volcker Rule Is Still a Bad Idea (Brookings)
Bank Lobby’s Onslaught Shifts Debate on Volcker Rule (Bloomberg)

And on to today’s links.

Facebook just bought all of your artfully sepia-toned cellphone pics – All Things D

Right before acquisition, Instagram closed a $500 million funding round – TechCrunch

AOL sells $1 billion in patents to Microsoft – Tech Crunch

Rites of Spring
How the mild winter made the economy look better than it actually is – WashPo

Obama’s BFF (“best friend in finance”) has unenviable task of calmly defending him to Wall Street – WSJ

Return of the (John) Mack – NYMag

Gray Areas
Obscure banks are charging big fees to do (legal) trades with Iran – WSJ

We don’t need publishing anymore, “editing, we need, desperately” – Findings

Since ’05 publishers lost $26.7 billion in print advertising revenue and gained only $1.2 billion in new digital revenue – Reflections of a Newsosaur

Mr. Market doesn’t exist – Math Babe

Size Matters
Large companies recovering more quickly from the recession than small businesses – WSJ

Sony is cutting 6 percent of its workforce – Bloomberg

Jim Yong Kim says he “had no idea what a hedge fund was” until three years ago – WSJ

You’re On Your Own
Money for job training has nearly been cut in half – NYT

Bank of America is so hot right now – NYT

Be Afraid
Ikea is going to build an entire neighborhood in London – Design Taxi

Foreign spies are now lurking in U.S. universities, experts warn – Bloomberg

Consumption inequality has risen about as fast as income inequality – Slate



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