The "World's Largest Prop Trading Desk" Just Went Bust
By Tyler Durden
Created 05/10/2012 - 17:49
 [1]
Submitted by Tyler Durden [1]
Published on ZeroHedge ( http://www.zerohedge.com)
on 05/10/2012 17:49 -0400
Ben Bernanke [2] Capital Markets [3] CDS [4] Collateralized Debt Obligations [5] Collateralized Loan Obligations [6] Convexity [7] Credit Crisis [8] Deutsche Bank [9] Dresdner Kleinwort [10] Lehman [11] Norway [12] Prop Trading [13] Risk Management [14]
A month ago we warned [15]that JPM's CIO office is nothing short of the world's largest prop trading desk. Not only were we right, but what just transpired is just shy of our worst possible prediction. At the end of the day, the real question is why did JPM put in so much money at risk in a prop trade because we can dispense with the bullshit that his was a hedge, right? Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least "net" is not "gross" and we know, just know, that the SEC will get involved and make sure something like this never happens again.
As for what we said before, we will just repost the whole thing as we were, once again, right.
From April13: Why JPM's "Chief Investment Office" Is The World's Largest Prop Trading Desk: Fact And Fiction [15]
For the fiction, we go to JPM's conference call transcript where we had the following disclosures.
- "I did want to talk about the topics in the news around CIO and just take a step back and remind our investors about that activity and performance. We have more liabilities, $1.1 trillion of deposits than we have loans, approximately $720 billion. And we take that differential and we invest it, and that portfolio today is approximately $360 billion. We invest those dollars in high grade, low-risk securities. We have got about $175 billion worth of mortgage securities, we have got government agency securities, high-grade credit and covered bonds, securitized products, municipals, marketable CDs. The vast majority of those are government or government-backed and very high grade in nature. We invest those in order to hedge the interest rate risk of the firm as a function of that liability and asset mismatch."
- "We hedge basis risk, we hedge convexity risk, foreign exchange risk is managed through CIO, and MSR risk. We also do it to generate NII, which we do with that portfolio. The result of all of that is we also need to manage the stress loss associated with that portfolio, and so we have put on positions to manage for a significant stress event in Credit. We have had that position on for many years and the activities that have been reported in the paper are basically part of managing that stress loss position, which we moderate and change over time depending upon our views as to what the risks are for stress loss from credit. And I would add that all those positions are fully transparent to the regulators. They review them, have access to them at any point in time, get the information on those positions on a regular and recurring basis as part of our normalized reporting. All of those positions are put on pursuant to the risk management at the firm-wide level. They are done to keep the Company effectively balanced from a risk standpoint.... " Of course, when you own the regulators, it is not much of an issue... And would it be the same regulators who we have now confirmed don't understand the first thing about markets [16]?
- "The last comment that I would make is that based on, we believe, the spirit of the legislation as well as our reading of the legislation and consistent with this long-term investment philosophy we have in CIO we believe all of this is consistent with what we believe the ultimate outcome will be related to Volcker."
For the facts, we go to Bloomberg [18] again, which was the first to break the Bruno Iksil story, and which exposes without shadow of a doubt why the Chief Investment Office is nothing but the world's largest prop desk. But hey, just as Goldman named it frontrunning service the " Asmymetric Service Initiative [19]" thereby magically not making it a frontrunning service, naming the world's largest prop desk the "Chief Investment Office" makes it no longer be the world's largest prop desk.
Here are the highlights [18]. First on the CIO group:
- Achilles Macris, hired in 2006 as the CIO’s top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said.
- Some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms.
- The CIO’s growing size and market power have made it an increasingly important customer to Wall Street’s trading desks and a market influence watched by hedge funds and other investors, the former employees said. Iksil’s positions in credit-derivatives have become so large that some market participants dubbed him “Voldemort,” after the villain of the Harry Potter series who’s so powerful he can’t be called by name.
- “What Bernanke is to the Treasury market, Iksil is to the derivatives market,” Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP in Los Angeles, where she helps oversee $32 billion, said in a telephone interview.
- Macris’s team amassed a portfolio of as much as $200 billion, booking a profit of $5 billion in 2010 alone -- equal to more than a quarter of JPMorgan’s net income that year, one former senior executive said.
And far more importantly on the background of the guy behind it all. It kinda, sorta sounds like he is a... gasp.... prop trading kinda guy
- It’s Macris, not Iksil, who was behind the strategy that led to an unprecedented build-up of credit risk in JPMorgan’s chief investment office, three former employees of the bank said. While they expressed doubt Iksil can unwind his positions without causing a dislocation in the markets he trades, they also said JPMorgan probably can afford to hold the assets until they mature and so won’t be forced to sell them.
- In 2011, corporate revenue of $3.3 billion included $1.6 billion of securities gains and produced $411 million of net income, the bank said in an annual filing on Feb. 29. By comparison, JPMorgan’s investment bank reported $26.3 billion in revenue and $6.8 billion of net income in 2011.
- Since 2007, the value of securities held in JPMorgan’s chief investment office and treasury has more than tripled to surpass $350 billion from $76.5 billion, according to company filings.
- Profit, not risk management, guided the purchases, according to the former employees. One of the employees, who previously held a senior executive position at the bank, said Dimon even ordered some of the trades himself.
- Dimon pushed the unit to seek bigger profits by buying higher-yielding assets, including structured credit, equities and derivatives, and ramping up speculation, according to two former employees.
- In London, Macris expanded his team, adding expertise in credit and fixed-income trading. A Greek citizen, Macris previously was co-head of capital markets at Dresdner Kleinwort Wasserstein before joining JPMorgan in 2006. In that role he helped oversee a unit that made proprietary trades, or bets with Dresdner’s own money, according to two people who worked with him at the time.
- Before joining Dresdner, Macris oversaw currency trading at Bankers Trust, now part of Deutsche Bank AG. Macris was an idea- generating machine who was blunt and didn’t suffer fools, said Duncan Hennes, who worked with him at Bankers Trust.
- At JPMorgan, Macris hired Evan Kalimtgis, a former head of credit portfolio strategy at Dresdner, to help with risk management, according to one former employee.
- In 2007 Javier Martin-Artajo, who had been Dresdner’s head of credit-derivatives trading, joined JPMorgan in London. George Polychronopoulos, who worked at hedge fund Endeavour Capital LLP, also joined the London office in 2009.
- Martin-Artajo, Polychronopoulos and Kalimtgis didn’t return calls and e-mails seeking comment.
- While Macris had a mandate to make money from the beginning, he didn’t start putting on big bets until after the credit crisis in 2008. Two of the former executives said the following year he bought AAA-rated pieces of collateralized debt obligations. As competitors dumped securities and prices slumped, Macris’s group at JPMorgan emerged as the biggest buyer in some markets, said one former executive at the bank who was familiar with the trades at the times.
- In one example, a New York-based CIO trader named Jonathan Horowitz bought about $1.1 billion of AAA-rated portions of collateralized loan obligations for about 80 cents on the dollar in November and December 2008, people familiar with the matter said at the time. Horowitz declined to comment.
Finally, the most damning evidence that JPM's World's Biggest Prop DeskTM, elsewhere known as the CIO, has to be dismantled lest it suffer the fate of all other massive prop desks, which promptly blew up in the days after the Lehman failure, is the following:
- One public sign that the chief investment office does more than hedge: Its trading risk is on par with that of JPMorgan’s investment bank.
- JPMorgan’s annual report for 2011 shows that the CIO stood to lose as much as $57 million on most days of the year. That compares with $58 million for the investment bank, which includes Wall Street’s biggest stock- and bond-trading units.
- Another sign: The relationship between the CIO and the investment bank’s sales and trading desks is strained, two former employees said. Employees in the CIO get a smaller share of their trading profits than those in the investment bank, giving Dimon a cost-management incentive to direct more trading through the CIO, one former executive said.
Hence: JPMs "Chief Investment Office" = World's largest prop trading desk. But hey, just repeat "Assymetric Service Initative" ... "Assymetric Service Initative" ... "Assymetric Service Initative" three times ... and it becomes truth.
Similar Articles You Might Enjoy:
Ben Bernanke Capital Markets CDS Collateralized Debt Obligations Collateralized Loan Obligations Convexity Credit Crisis Deutsche Bank Dresdner Kleinwort Lehman Norway Prop Trading Risk Management
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JPMorgan Said to Transform Treasury to Prop Trading
By Erik Schatzker, Christine Harper and Mary Childs
BLOOMBERG
Apr 13, 2012
JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon has transformed the bank’s chief investment office in the past five years, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes.
Achilles Macris, hired in 2006 as the CIO’s top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York-based bank, three of the former employees said. Dimon, 56, closely supervised the shift from the CIO’s previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.
Some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms. Bruno Iksil, a London-based trader in Macris’s group, gained attention last week after moving markets with his trades, drawing a comparison to Federal Reserve Chairman Ben S. Bernanke’s power in the government-bond market.
“What Bernanke is to the Treasury market, Iksil is to the derivatives market,” Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP in Los Angeles, where she helps oversee $32 billion, said in a telephone interview.
Lines Blurred Macris’s team amassed a portfolio of as much as $200 billion, booking a profit of $5 billion in 2010 alone -- equal to more than a quarter of JPMorgan’s net income that year, one former senior executive said.
The shifting role of the CIO group at JPMorgan, which reported record firmwide profit for 2011, underscores how blurry the line can be between “proprietary trading” and hedging, and it highlights the challenge U.S. regulators face in curbing speculative bets by federally backed lenders under the so-called Volcker rule. JPMorgan, whose $2.27 trillion of assets at year-end made it the biggest U.S. bank, says the CIO manages the firm’s risks, with trades like Iksil’s forming a part of that effort.
“It’s a complete tempest in a teapot,” Dimon said on a conference call with investors today after the bank announced first-quarter earnings. “Every bank has a major portfolio and in those portfolios you make investments that you think are wise.”
‘Voldemort’ The bank believes that its CIO activities comply with both the letter and the spirit of the Volcker rule, Chief Financial Officer Doug Braunstein, 51, said on the call. Regulators “see everything and anything we do whenever they want,” Dimon said on an earlier call with reporters today.
The CIO’s growing size and market power have made it an increasingly important customer to Wall Street’s trading desks and a market influence watched by hedge funds and other investors, the former employees said. Iksil’s positions in credit-derivatives have become so large that some market participants dubbed him “Voldemort,” after the villain of the Harry Potter series who’s so powerful he can’t be called by name.
Yet it’s Macris, not Iksil, who was behind the strategy that led to an unprecedented build-up of credit risk in JPMorgan’s chief investment office, three former employees of the bank said. While they expressed doubt Iksil can unwind his positions without causing a dislocation in the markets he trades, they also said JPMorgan probably can afford to hold the assets until they mature and so won’t be forced to sell them.
Earnings Report London-based Macris, 50, didn’t reply to a call seeking comment. He, Iksil and JPMorgan haven’t been accused of any wrongdoing.
JPMorgan, which reported today that it earned $5.38 billion, or $1.31 a share, in the first quarter, doesn’t break out revenue or profit for its chief investment office. The bank lumps the office into a “corporate” line item that also includes treasury and the firm’s centrally managed divisions such as audit, finance and human resources.
In 2011, corporate revenue of $3.3 billion included $1.6 billion of securities gains and produced $411 million of net income, the bank said in an annual filing on Feb. 29. By comparison, JPMorgan’s investment bank reported $26.3 billion in revenue and $6.8 billion of net income in 2011.
Surge in Holdings Since 2007, the value of securities held in JPMorgan’s chief investment office and treasury has more than tripled to surpass $350 billion from $76.5 billion, according to company filings. The biggest jump was in 2009, when the company disclosed that the CIO made “significant purchases” of government-backed mortgage securities, asset-backed securities, corporate securities, as well as U.S. Treasury and government-agency securities, according to the filings.
“These investments were generally associated with the chief investment office’s management of interest-rate risk and investment of cash resulting from the excess funding the firm continued to experience during 2009,” according to the company’s 10-K report for 2009, filed in February of 2010.
The securities portfolio is about $360 billion today, Braunstein said in the conference call with reporters. “That generates earnings for us, and it also balances our interest-rate risk,” he said.
Profit, not risk management, guided the purchases, according to the former employees. One of the employees, who previously held a senior executive position at the bank, said Dimon even ordered some of the trades himself.
Management Changes The transformation of the CIO has its origins in Dimon’s arrival at JPMorgan with the purchase in July 2004 of Bank One Corp., where he was CEO. Less than three months later, Dimon’s long-time lieutenant Michael Cavanagh became chief financial officer. He replaced Dina Dublon, a 23-year veteran of JPMorgan and its predecessors.
At the time, JPMorgan also said Ina Drew, who ran global treasury at JPMorgan prior to the acquisition, would report directly to Dimon. Drew’s title changed in February 2005 to“chief investment officer,” according to the 2005 year-end filing.
Dimon pushed the unit to seek bigger profits by buying higher-yielding assets, including structured credit, equities and derivatives, and ramping up speculation, according to two former employees. While Drew’s unit previously had small teams of traders who took speculative “macro” positions in currencies and interest-rate products, people who worked there at the time say the focus shifted and traders were given permission to put more capital at risk.
Missile in Flight In London, Macris expanded his team, adding expertise in credit and fixed-income trading. A Greek citizen, Macris previously was co-head of capital markets at Dresdner Kleinwort Wasserstein before joining JPMorgan in 2006. In that role he helped oversee a unit that made proprietary trades, or bets with Dresdner’s own money, according to two people who worked with him at the time.
One former colleague at Dresdner said he remembers visiting Macris’s London apartment in 2004 for a gathering of fellow colleagues from the firm. He said he was struck by a picture on the wall in a room that contained more than six trading screens. The picture, which he estimated was more than six-feet high and six-feet wide, was of a missile in flight.
‘Off-the-Wall Ideas’ Before joining Dresdner, Macris oversaw currency trading at Bankers Trust, now part of Deutsche Bank AG. Macris was an idea-generating machine who was blunt and didn’t suffer fools, said Duncan Hennes, who worked with him at Bankers Trust.
“He always had off-the-wall ideas, but in hindsight sort of smart ideas,” Hennes said in a telephone interview. “He was always thinking out of the box.”
David Sandelovsky, who reported to Macris at Bankers Trust in the 1990s, remembers being impressed with his “great knowledge” of art, wine, politics and history. He was an active trader -- “a big hitter” -- as well as a manager, Sandelovsky said.
“It wasn’t just a simple ‘Let’s go long the dollar against the yen,’” Sandelovsky said. “He had serious ideas, and they were macro, involving interest rates, foreign exchange. He didn’t think in simplistic terms.”
At JPMorgan, Macris hired Evan Kalimtgis, a former head of credit portfolio strategy at Dresdner, to help with risk management, according to one former employee.
‘London Whale’ In 2007 Javier Martin-Artajo, who had been Dresdner’s head of credit-derivatives trading, joined JPMorgan in London. George Polychronopoulos, who worked at hedge fund Endeavour Capital LLP, also joined the London office in 2009.
Martin-Artajo, Polychronopoulos and Kalimtgis didn’t return calls and e-mails seeking comment.
Iksil, whose credit-derivatives trades have earned him the moniker “London Whale,” joined JPMorgan in 2005 and has held his current role since 2007, according to his career-history record with the U.K. Financial Services Authority. He worked at the French investment bank Natixis from 1999 to 2003, according to data compiled by Bloomberg.
While Macris had a mandate to make money from the beginning, he didn’t start putting on big bets until after the credit crisis in 2008. Two of the former executives said the following year he bought AAA-rated pieces of collateralized debt obligations. As competitors dumped securities and prices slumped, Macris’s group at JPMorgan emerged as the biggest buyer in some markets, said one former executive at the bank who was familiar with the trades at the times.
Trading Risk In one example, a New York-based CIO trader named Jonathan Horowitz bought about $1.1 billion of AAA-rated portions of collateralized loan obligations for about 80 cents on the dollar in November and December 2008, people familiar with the matter said at the time. Horowitz declined to comment.
The portfolio now includes about $70 billion of securities linked to European mortgage debt, Dimon said today. Braunstein said the “vast majority” of the overall portfolio is government or government-backed debt, and about $175 billion is mortgage-related.
“It’s a big portfolio,” Dimon said. “It’s sophisticated, obviously complex, but at the end of the day it’s our job to invest that portfolio intelligently over a long period of time to earn income and offset other exposures we have.”
One public sign that the chief investment office does more than hedge: Its trading risk is on par with that of JPMorgan’s investment bank.
JPMorgan’s annual report for 2011 shows that the CIO stood to lose as much as $57 million on most days of the year. That compares with $58 million for the investment bank, which includes Wall Street’s biggest stock- and bond-trading units.
‘Extraordinary Platform’ Another sign: The relationship between the CIO and the investment bank’s sales and trading desks is strained, two former employees said. Employees in the CIO get a smaller share of their trading profits than those in the investment bank, giving Dimon a cost-management incentive to direct more trading through the CIO, one former executive said.
Last year Drew, 55, hired Irene Tse, a former Goldman Sachs Group Inc. partner, to oversee the CIO in North America. Tse more recently was a portfolio manager for Stanley Druckenmiller’s hedge fund Duquesne Capital Management.
JPMorgan “offers an extraordinary platform for me and the entire CIO group to invest and manage risk,” Tse said in the January 2011, press release announcing her appointment.
Drew and Tse didn’t reply to e-mails and phone calls seeking comment.
‘Very Comfortable’ JPMorgan, like rivals, has shut groups in the investment bank that specialized in speculative bets with the company’s own money, anticipating implementation of the Volcker rule. The ban, part of the Dodd-Frank financial-reform law, will prohibit banks backed by the federal government from engaging in so-called proprietary trading. One former JPMorgan employee said the number of risk-taking traders in the CIO has been reduced in recent months.
“We have had for many years a structural credit book that hedges against stress loss, meaning downturns in the credit market,” Braunstein said today. “These positions that you’ve all been writing about are just simply part of that structural credit book, which, by the way, we’ve been reducing over time, and we are very comfortable with the positions that we have.”
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