Comments on: How Bruno Iksil lost $2 billion http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: FifthDecade http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39178 Fri, 18 May 2012 01:23:39 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39178 @Realist50 Are you trying to say the banks ignored common sense just because the regulators said it was OK? Were they really so unworried about repayment of debt? I don’t think so, and any bank that did had fools in charge. Just because debt is expressed in a single currency doesn’t mean you treat each borrower the same way; the risk of repayment varies. Even at the time of the Euro launch it was widely reported on TV and in the media that Greece had fiddled the figures to get into the currency in the first place. Greece shouldn’t have been let in, but that was a political decision by Germany’s right wing Chancellor, Helmut Kohl and France’s Socialist President, Francois Mitterand who drove the sudden Eurozone expansion.

By hedging risk down (or thinking risk has been reduced), the perceived need for higher interest rates declines, which increases borrowing for overspending countries – but one day comes the reckoning… if the risk had not been hedged, the real risk would not have been disguised, and the degree of danger would have been harder to ignore.

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By: MrRFox http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39160 Thu, 17 May 2012 17:41:56 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39160 @R50 – That first paragraph of yours is spot on. About the second one –

IDK – this loss at JPM looks terrible, but weighed against all the homeruns the JPM prop traders have racked-up in the past, it doesn’t compare at all. Expecting perfection or a record that never has a monumental screw-up on it is pretty unrealistic it seems.

Still, insured deposit-taking institutions shouldn’t be doing this kind of thing IMO.

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By: realist50 http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39156 Thu, 17 May 2012 16:56:51 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39156 Fifth Decade – I’d argue that the low rates on Greek debt had very little to do with hedging and a lot to do with banking regulation that treated all Euro-zone debt as a risk-free asset, which provided banks with a bad incentive to load up on the worse credits to find a little more yield and thereby also compressed yields more than should have occurred.

That said, I agree with your broader point that JPM would almost certainly be better off with less financial engineering. I can understand the desire on their part to hedge interest rate risk or currency exchange rate risk, for example. I expect a bank to be long corporate credit, though, so as an investor I’d prefer to make an investment decision with that fact in mind rather than have management try to undertake a complicated set of trades that hedge some of that broad credit risk, then try to fund the cost of those hedges, etc.

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By: FifthDecade http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39150 Thu, 17 May 2012 15:19:06 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39150 It does make one wonder how much better off JPM would be if they hadn’t indulged in all this financial engineering in the first place. Sometimes it sounds like people who think they are cleverer than they are (or at least, have persuaded someone who pays big salaries to think they are) are doing the equivalent of applying the Pythagoras theorem to determine the location of an unobserved quark.

Imagine a world in which this financial engineering and hedging was not done. Everybody would be long on positions, and would have to measure the real risks of lending to places like Greece, and the rates on Greek debt would have risen long ago so as to offset the known risk rather than having been artificially kept lower than it should have been.

The effect of the current position is there are a lot more Porsche Cayenne’s in Greece than their would have been if Greek debt had been rated more expensively – and more honestly. It’s all very well costing 20% after the event, but that’s like putting a second bolt on the stable door long after the horse has gone. If those rates had applied earlier, they could have gone a long way to mitigating the losses that now have to be paid for – and Greek debt is the only EZ debt that has had a haircut so a balanced approach to investing in debt of EZ countries would have put just 2% in Greece, and lost just 1% of total European exposure, although it would have earned 80% of that from the higher rates that should have been charged, meaning a 20 basis point exposure, less grief in Greece, and a much smaller banking crisis perhaps.

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By: CasualSophist http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39149 Thu, 17 May 2012 14:25:27 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39149 Crap, @Felix above… should read “wasn’t trading the basis but rather trading the correlation”.

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By: CasualSophist http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39148 Thu, 17 May 2012 14:18:10 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39148 @alea

Maybe confusing wording in Felix’s piece but clear from the context in the FT article that he meant buy (cheap) protection, i.e. take the other side of the whale.

Also, Felix, pet peeve of mine but I’m not sure I’d call this a “basis trade” loss, at least based on what we know to date. Seems like he wasn’t trading the basis correlation on the IG.9 3-7% tranche to the index (with a possible curve element thrown in if the tranche was on the 5y with the offsetting index leg on the 10y, as seems likely).

At least as far as we know, he wasn’t trading the (synthetic) index against the (cash) underlying, which would be a true “basis trade”.

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By: TFF http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39146 Thu, 17 May 2012 14:11:09 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39146 “The $2 billion did not disappear. It was just transferred to someone else.”

Yes, but under Wall Street rules, every time $2B is transferred from one pocket to another, the gambler directing the winning side of the trade pockets 20% to 50% of the proceeds as a bonus.

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By: LadyGodiva http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39144 Thu, 17 May 2012 13:52:10 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39144 Correction: $3 Billion and counting.

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By: alea http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39142 Thu, 17 May 2012 10:55:39 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39142 Felix:
If Weinstein’s trade idea was “to buy Investment Grade Series 9 10-Year Index CDS (maturing on 12/20/2017).” it means he was selling protection, same as what the “whale” was reputed to do.

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By: Nicostrata http://blogs.reuters.com/felix-salmon/2012/05/16/how-bruno-iksil-lost-2-billion/comment-page-1/#comment-39139 Thu, 17 May 2012 05:05:28 +0000 http://blogs.reuters.com/felix-salmon/?p=14137#comment-39139 The $2 billion did not disappear. It was just transferred to someone else. Probably a lot of small funds and a couple large ones that may give a lot more to charity than JPM. Nevertheless, no real capital — meaning, like a building, or a process or whatever asset you want to imagine, was destroyed.

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