Simon English: How London Whale's errors attracted the market sharks


Simon English
Tuesday 22 May 2012 01:49

The football match of your lifetime starts in 20 minutes but you don't have a ticket. You will pay whatever the touts on the corner are demanding.

The thing is, you've noticed from the TV pictures in the bar that the stadium is far from full. Not everyone is as fascinated by this game as you, it turns out.

The touts are gathering outside the entrances. They seem to have a slightly desperate tone. One makes the mistake of pulling out a wad of tickets from his inner pocket. He has hundreds to sell very quickly or else he will have lost a bundle, you realise.

Like you, he expected this game to be far more popular than it turns out to be. He is seriously long of tickets. You are short of them, but the going rate is moving in your favour. If you just hold your nerve, trust your judgment, you'll pick up a ticket in five minutes time for far less than its face value.

The touts will lose.

That's not a perfect analogy for what has happened to the so-called London Whale at JP Morgan but it might do. He was so long, so massively overbought, of a specific sort of synthetic credit derivative (don't ask, just stick with me) that once his position became known to rivals he was bound to be squeezed.

Bruno Iksil had a $100bn position in the 10-year Markit CDX North America Investment Grade Index Series 9 (don't ask, see above). That's a bit like a ticket tout holding 50,000 tickets for a game where the capacity is 75,000. He intended to hold these positions for the longer term, but when too many people started betting that they would fall, he had to try and cut his losses.

Once JP Morgan realised its mistake, it could have announced the maximum possible losses from the trades. Instead it said what the losses were at that moment in time, and hoped a change in sentiment and some clever trading would stop them spiralling.

So far, the market is still moving the other way. The whale is being circled by sharks. They see that he remains vulnerable to attack. Jamie Dimon, the JP Morgan boss, called all this an "egregious" failure. There were many "errors, sloppiness and bad judgment".

No kidding. And the game hasn't even kicked off yet.

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