Stephen Foley: Dimon causes a tangle

 

US Outlook Hedge/hej/*. A tangle of impenetrable bushes designed to obscure your activities from public view. (From the Oxford English Dictionary, as reimagined by Jamie Dimon.)

The JPMorgan Chase chief executive's performance in front of the Senate Banking Committee was a triumph of linguistic gymnastics. As for illuminating what went on at the bank's chief investment office — not so much.

The original positions taken by the CIO, which look for all the world like a bet on worsening credit market conditions, were described by Mr Dimon as a "hedge" against a catastrophic new credit crisis. By so characterising them, he subtly reminded his audience how he had cleverly steered JPMorgan through the last credit crisis unscathed. (In case they didn't get it, he explicitly reminded them how he had cleverly steered the bank through the last credit crisis. He reminded them many times.) Disaster struck when the CIO decided to reduce its bet in the face of improving credit conditions. Sorry, that should read "when the CIO added offsetting positions to reduce the existing ones". That over-complicated effort blew up in everyone's face.

Senator Jack Reed was one of the most effective during Wednesday's hearing in zeroing in on the absurdity of calling the CIO's work a "hedge".

If you can increase, then decrease, your position without regard to any specific underlying portfolio of credit-market exposures, you are not hedging but speculating. The CIO was designed to be a profit centre, as Mr Dimon saidat the outset. Not big profits, sure, but profits none the less. A hedge, by definition, is a money-losing proposition, like insurance; it will cost you money and in extremis will merely offset other losses.

In Mr Dimon's dictionary, "proprietary trading", the practice of speculation banned under the Volcker Rule, is redefined as "portfolio hedging". Banks are big enough and complex enough that they can always find some part of their portfolio that they claim a new speculative trade is designed to hedge. He took the definition to new levels of absurdity this week, by suggesting any bet against the credit markets is a hedge against the risks involved in the bank's normal lending activities.

Definitions matter. Ask the regulators trying to define "hedge" for the purposes of the Volcker Rule. Just don't ask Jamie Dimon.

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