Counterparties: Should we fear Voldemort?

By Ben Walsh
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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Another reason — as if we needed one — to break up the TBTF banks.

Posted by Mitchn | Report as abusive

Another great story about this mysterious trader on MarketSnacks. Good explanation for those who don’t know swuat about prop trading and the Volcker Rule.

The “London Whale;” “Voldemort;” “He who mustn’t be named.” Bruno Iksil is a Frenchmn with a slender frame who is generally considered a decent person (people love to say his name, try it). None of those nicknames seem to fit his personality, yet that is what hedge fund managers have dubbed this JP Morgan (JPM) trader in London. ts-drop-big-on-first-day-of-trading-afte r-fridays-major-march-employment-report/

Posted by jkkramer9 | Report as abusive

The issue with the Volcker rule is that there hasn’t been a single case shown where a taxpayer “backed” firm in the crisis went under or was in danger of going under based due to prop trading, with the possible exception of Frannie who I believe would be exempt anyway.

Posted by Danny_Black | Report as abusive

Why are they calling this guy a whale if he only generate $100 million in revenue. That is good money, but it hardly qualifies as a whale for a trader.

Posted by sditulli | Report as abusive

Danny_Black, really? Citi doesn’t go under without the $85 million in taxpayer funds? AIG (not a bank) doesn’t go under without $185 million in taxpayer funds. And if they both go under, how long before Morgan Stanley and Goldman follow? Followed by JP Morgan. Game set, match.

Posted by Mitchn | Report as abusive

Mitchn, thank you for proving that Volcker appeals to mostly people who have no idea what they are talking about.

Citi got into trouble over bad loans. AIG failed because of the brilliant move by its treasury dept to “invest” its cash in slightly higher yielding debt. Morgan Stanley’s liquidity issues were solely down to a run on the prime brokerage arm by its hedge fund clients. None of those were prop trading issues and none would be banned under the new rule.

To be fair, you would struggle to know this by coverage but facts are so much more boring and don’t sell as well to the self-righteous outrage brigade.

Posted by Danny_Black | Report as abusive

Mr. Black is back – and so is his usual script.

@Mitchn – those are billions, not millions, in your post, aren’t they? A couple of hundred million isn’t even worth talking about now days.

Posted by MrRFox | Report as abusive

MrRFox, yes, billions.

Posted by Mitchn | Report as abusive

MrRFox or Mitchn, care to name the prop trades at Citi or AIG which caused the taxpayer to have to bail them out? Since it is so blindingly obvious you should have no problem giving specific examples, right?

Posted by Danny_Black | Report as abusive

Frankly, it really doesn’t matter whether or not prop trading was the “cause” of a particular firm “going down” during the 2008 crisis. Even if the crisis had never happened, The Volcker Rule would still be a good idea.

Banks, bank holding companies, etc. shouldn’t be gambling with a taxpayer money-provided backstop to their house bets via the indirect means of federally-insured deposits, and the Volcker Rule is a reasonable, albeit probably inadequate, mechanism that attempts to rein that practice in.

Notice the use of rhetoric here: Danny_Black doesn’t even attempt to defend the idea of financial companies having a taxpayer-provided backstop to support prop trading desks. No, he just challenges someone to provide proof that prop trading caused one or more firms to become insolvent. Then when no one can provide such proof, that’s supposed to convince us that having a taxpayer-provided backstop to support prop trading desks isn’t something worth avoiding. Nifty!

No wonder people that work on Wall Street think of everybody on Main St. as sheep.

Posted by Strych09 | Report as abusive

Strych09′s post is a little bit long so as a public service I will summarise:

“Can’t think of a single example, even in the midst of the worst markets in nearly a century but will continue to insist prop trading is a problem because it fits my ideology”.

After all, why bother focusing on things that really caused the financial crisis such as loaning money to people who cannot or will not pay back, chasing diminishing returns for the same level of risk and crowded trades? Lets focus on capital ratios and prop trading because after all been proven over and over that “boring” commercial banking is 100% safe.

Posted by Danny_Black | Report as abusive

Danny Black’s Wall Street Love Song is likewise a bit too much, so as a public service I’ll punch a hole or two in it.

Some problems with prop trading – It creates a conflict of interest situation between a bank and its “muppets” ala GS; it encouraces excessive risk-taking by traders and managers (if they score big they get paid big – if they bankrupt the firm, so what? – not it’s their money they lost, ala Nick Leeson; it can encourage firms to inventory low quality products, like sub-prime CDS/MBS stuff that gets stuck on the bank’s balance sheet when the whole fraudulent enterprise comes unwound, ala damn near everybody, but particularly Bear Stearns and Lehman.

But you do have a one good point, Danny – the losses from this kind of thing do seem trivial compared to the damage that arose from doing “safe” stuff – like sub-prime mortgages, and really all mortgages in a bubble situation. But then, we all like that kind of feel-good stuff – until it blows-up in our faces.

Posted by MrRFox | Report as abusive

MrRFox, why does prop trading create a conflict of interest? If my sole job is to make money for the bank by buying from you or you buying from me then how can there be a conflict? It is the market making arm and agency stuff that is rife with conflicts. Nick Leeson is a great example, he was not meant to be prop trading, he was meant to be executing client trades and fabricated such “clients”, if he was purely prop trading then he would never had got to such a large outright position. The inventories of low-grade stuff was solely due to client driven business such as underwriting CDOs or manufacturing MBS derivatives for clients.

Posted by Danny_Black | Report as abusive

“MrRFox, why does prop trading create a conflict of interest?” (DB)

It’s inherent if the muppet is also a “client” of other srevices from the bank. GS can’t ethically give any kind of advice or service to a muppet and then later take the other side of a trade – this is doubly true if the client came to GS with a request that GS create the trade and find a counter-party; it cannot ethically be the counter-party itself, as its interest would be opposed to the client’s.

You and I have a different take on Leeson. As I understand it he put the winning trades in his prop trading ledger and the losers in fictitious customer accounts. The customer accounts were just a cover mechanism – he had the green light to prop trade.

Posted by MrRFox | Report as abusive

The market-maker is always the counterparty and always lays off the trade – unless it is a name give up or because they are taking a prop position, respectively. So he is always taking the contrary position to you initially. They are also not “giving advice” because then they would be an investment advisor.

Posted by Danny_Black | Report as abusive

also the point about leeson was he was not meant to be taking outright bets and so had to fabricate client trades to make his book balanced.

Posted by Danny_Black | Report as abusive

@DB – Bull…. about Leeson – he was the superstar of Barings, due to the apparently astronomical arb-trading profits he rang-up. How could he do that without the authority to take prop positions? He certainly exceeded his authority in degree, but not in character. In any case, what Leeson actually did engage in was prop trading, and his fate and the bank’s demonstrates why it should be discouraged.

Your view of conflicts of interest doesn’t amount to a denial of their existence, but only an assertion of a privilege for banks to flagrantly have them and profit from them at the expense of their customers/clients – like anyone expected anything else from you. Are comfortable with the term “shill”?

Posted by MrRFox | Report as abusive

MrRFox, on the tiny chance that you are actually interested in facts can I suggest a good book on Leeson called “All that glitters”. Leeson engaged in unauthorised prop trading which he masked as client trading. The key phrase here is unauthorised, not prop trading.

You seem to be utterly confused as to what different people in different bits of a financial company do which is why you – and to be fair most of the world – seems to think there are “conflicts of interest”.

As for shilling, I should feel proud that apparently my ex-profession is so utterly blameless that people are repeatedly forced to resort to lying and fabrication to chastise it.

Posted by Danny_Black | Report as abusive

@DBlack – we’re both starting to repeat ourselves now. We do seem to agree that Leeson did in fact engage in prop trading. Perhaps his employer didn’t authorize exactly the way it was done, but it’s the losing prop trades, not the lack pf authority, that destroyed Barings and Leeson both. So many other have suffered from prop trading too – Hammanaka/Sumitomo, Kerviel/SG – it just not the kind of thing a taxpayer-backstopped company should be doing. Government must put a stop to it.

We don’t need to fret about conflicts of interest any longer. Now that they are out on table for all the muppets and their shareholders and the whole world to see, corporate CFOs will put a stop to it, or be in breach of their own fiduciary duties.

Posted by MrRFox | Report as abusive

MrRFox, so your solution is to make illegal trading illegal? All the examples you have quoted are exactly the same, a guy taking an outright position they are not allowed to take by pretending it is actually a client position.

Any CFO or buyside that doesn’t know the difference between a market maker or sales and an investment advisor is already in breach of their fiduciary duties by not informing their superiors or clients they are clueless.

Posted by Danny_Black | Report as abusive

@DBlack – this is getting old Danny.

None of the rogue traders cited did anything inherently illegal by making prop trades; the illegality came from attempting to conceal losses on otherwise legal trades.

Prop trading is just too hot to handle for a government-backstopped entity. It wouldn’t pay as well as it does when it’s (temporarily) done right if that weren’t the case. The whole business has to be outlawed for this class of actors. Citi had to get rid of Phibro, even though those guys were magicians at oil trading. It’s just not an activity a bank should be into.

Posted by MrRFox | Report as abusive

MrRFox, yeah nothing illegal they just fancied spending time in jail.

Posted by Danny_Black | Report as abusive

@DBlack – this is getting old Danny.

None of the rogue traders cited did anything inherently illegal by making prop trades; the illegality came from attempting to conceal losses on otherwise legal trades.

Prop trading is just too hot to handle for a government-backstopped entity. It wouldn’t pay as well as it does when it’s (temporarily) done right if that weren’t the case. The whole business has to be outlawed for this class of actors. Citi had to get rid of Phibro, even though those guys were magicians at oil trading. It’s just not an activity a bank should be into.

Posted by MrRFox | Report as abusive

MrRFox, when you actually know what you are talking about feel free to engage again, otherwise can I suggest a career in financial “journalism”.

Posted by Danny_Black | Report as abusive