Thread: Someone explain JP Morgan losses to me

Ok so their losses are from hedged bets, designed to protect against losses from the trades being hedged. How do you screw that up??

If for example I'm long 5000 shares of CAT, and I want a hedge against the downside risk, I buy puts to limit downside risk. If the stock continues to go north, then the risk is offset by the rise in share price.

I know they were trading Credit default swaps, not stocks but I dont understand...

Not to get too into it, but they bought fnancial derivatives in s relatively small market betting that European debt would get better (not 100% sure about that bit) but they were basically the biggest buyer in the market by far. So when Europe went down they got screwed and because their positions were relatively illiquid because they were the biggest player in the market they couldn't just dump the derivatives and wipe their hands of the loss. Also because they were such a big buyer other hedge funds noticed the activities and took up positions agains jpms so they made money wether Jom lost their shirt

It's more complicated than that but what I described is what I understand the get of it to be

^^^ This is about my understanding of things. At one point they were accounting for about 70% of the buying in the market IIRC. Not sure exactly what they were thinking. One of the more interesting things that I read was the author of the article thought that they had a hell of a lot more than 2bil (closer to 5 bil) in losses, but that they were going to unwind the positions slower to keep from getting completely slaughtered when they sold the rest. Will be interesting to see how much more we hear about this.

Ryan

Originally Posted by H34D SH01

Not to get too into it, but they bought fnancial derivatives in s relatively small market betting that European debt would get better (not 100% sure about that bit) but they were basically the biggest buyer in the market by far. So when Europe went down they got screwed and because their positions were relatively illiquid because they were the biggest player in the market they couldn't just dump the derivatives and wipe their hands of the loss. Also because they were such a big buyer other hedge funds noticed the activities and took up positions agains jpms so they made money wether Jom lost their shirt

It's more complicated than that but what I described is what I understand the get of it to be

If you'd like to divulge more info, I'd be interested in hearing. I find it pretty interesting.

Were they hoping they would lead the way and create a bandwagon?

Anyone have links to articles?

Originally Posted by DanielGonz

If you'd like to divulge more info, I'd be interested in hearing. I find it pretty interesting.

Were they hoping they would lead the way and create a bandwagon?

Anyone have links to articles?

Heres a article that goes into some depth on what they were doing and how they got screwed. http://www.nytimes.com/2012/05/27/bu...pagewanted=all

part of it is that they just call it a hedge.. they made a very speculative large size bet in an illiquid market that was so big they themselves became the market so they had no one to sell to if they needed to get out of the position. once that happens and other funds and players know that they wont provide any bid or liquidity knowing there will be some margin selling and liquidations down the road ..they may even force the sell pressure with rumors and shorts causing a cascading effect.

Originally Posted by Stance

Ok so their losses are from hedged bets, designed to protect against losses from the trades being hedged. How do you screw that up??

If for example I'm long 5000 shares of CAT, and I want a hedge against the downside risk, I buy puts to limit downside risk. If the stock continues to go north, then the risk is offset by the rise in share price.

I know they were trading Credit default swaps, not stocks but I dont understand...

Sounds like a noob mistake.

Originally Posted by Stance

Sounds like a noob mistake.

More like one hand not knowing what the other hand is doing. I remember reading something that said JPms mutual fund unit actually bought a fund or something that was on the other side of trade that ended up costing them. So they were playing both sides of the trade without even knowing it!

It makes you wonder who hires these number crunchers to do this at JPM. I mean, doesnt the hiring manager investigate the resume' of these guys? I know the market is somewhat to blame, but someone at one point at JPM had to say " Yeah this sound like a good idea, lets go with it"...Just puzzling.
In any company anywhere, major ideas are brought up only without enough background checking.

Originally Posted by rstang42

It makes you wonder who hires these number crunchers to do this at JPM. I mean, doesnt the hiring manager investigate the resume' of these guys? I know the market is somewhat to blame, but someone at one point at JPM had to say " Yeah this sound like a good idea, lets go with it"...Just puzzling.
In any company anywhere, major ideas are brought up only without enough background checking.

Granted I do not do a single thing with that field, you should see the people they hire here. Sometimes I feel asking my dog to do the work, will get me better results

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