Let's not hedge about JP Morgan's losses

[marmar]

Let's not hedge about JP Morgan's losses
This wasn't hedging; it was a huge bet. Wall Street's titans just hope we and regulators are too mystifed by high finance to know

Charles Geisst
guardian.co.uk, Tuesday 15 May 2012


The recent revelations by JP Morgan Chase of large hedging losses ultimately bring too big to fail to the forefront once again. But the issue needs to be rephrased in a slightly different context. Is an institution's exposure to the markets actually too big to hedge?

The term "hedging" is a red herring in banking. Banks regularly hedge foreign exchange exposure and bond exposure by taking opposite positions to offset potential losses. The hedge positions usually are of the same size or proportion as the actual positions. But when a bank decides to hedge the market – a macro hedge – then a new set of risks is presented. What seems safe most likely is nothing more than a large bet.

A hedging loss implies that the hedge did not match the position to be offset. This is another category of risk, when hedging enormous positions by adopting counter-positions. Even worse, a loss or gain in hedging means that the hedged position or the hedge itself was lifted, leaving the other side still in place exposed again.

That is not hedging; it is outright speculation. ...................(more)

The complete piece is at: http://www.guardian.co.uk/commentisfree/cifamerica/2012/may/15/lets-not-hedge-about-jpmorgan-losses

[dkf]

1. It could have been a hedge that wasn't managed properly...per FT Alphaville.

A curve trade with the best of intentions

Like most trades, it probably started harmless enough, or it least it seemed that way. After all, no one enters into a trade to lose money.

While it’s impossible to know what the CIO did without further disclosure from JP Morgan, FT Alphaville thought they had entered into a curve trade, based on market data and what statements the bank did make about what sort of thing the CIO does.

In short, we thought this particular curve trade was a flattener, that being a type of trade which allows one to take a bearish view. If you had such a trade in place in the fall of 2011, you would have done well for yourself, thanks to general turmoil in the markets. What followed after that though, in 2012, is all together different.

--
A flattener trade is just fine in reasonable doses, i.e. if there’s enough liquidity in the market to support it.

Unfortunately, with curve trades, you have to rebalance them reasonably actively, due to spread movements and the passage of time. “Rebalancing” here means keeping the ratio of protection bought at the short end to protection sold at the long end just right. Get this wrong and your position will start to look even more risky and volatile — as it seems JP Morgan has recently discovered. But before talk about recent events, let’s look at the build up to it.

http://ftalphaville.ft.com/blog/2012/05/11/996131/too-big-to-hedge/

[raouldukelives]

2. Wall St has always been a giant casino.

The only difference is that the chips are our forests, oceans and human beings.
But then that's why I have a higher respect for compulsive gamblers than compulsive investors. At least they are only making their own life hell.