Streetwise Professor

May 10, 2012

The Whale Marched Up the Hill, and He Marched Down It Again

Filed under: Derivatives,Economics,Financial Crisis II,Politics,Regulation — The Professor @ 3:30 pm

JP Morgan just announced a huge-$800 million $2 billion!-mark-to-market loss in the synthetic credit portfolio run out of its Chief Investment Office.  Bruno Iksil-“The Whale”-is almost certainly wearing the collar for this bloodbath (uhm, I think that’s a mixture of 3 metaphors-whatev).

Some immediate reactions.

  1. Whales get harpooned.  No matter how big you are, the markets are bigger.
  2. Traders can move prices by putting on big enough trades.  It’s not moving prices that is the trick: it is profitably closing big positions after you moved the price.  There has to be some asymmetry.  If your buying drives up prices, your selling to exit a position is almost certain to drive them down-and indeed, drive them down more due to market frictions.
  3. That is, to be profitable, Whale Trades require an exit strategy.  Corners have an exit strategy-but even these are not foolproof, as many cornerers have found to their dismay.  Some other manipulative strategies, such as moving a price that affects the payoff to a related derivative, also have an exit strategy.  But just flexing, just moving a price by trading in huge size, is vanity and usually results in losses because there is no exit strategy. Like the Duke of York, you can march up the price hill by buying a lot, but you end up marching down the hill again when you try to sell.
  4. Banks can kiss any weakening of the Volcker Rule adios! Indeed, the rule is likely to be tightened considerably.  I’m sure Jamie Dimon is getting lots of love from his fellow CEOs.  Lots.
  5. Speaking of Dimon, I wonder if he can kiss his job good bye.
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  1. […] The Whale Marched Up the Hill (Streetwise Professor) […]

    Pingback by Harpooned! | The Reformed Broker — May 10, 2012 @ 4:46 pm

  2. If you want to talk about whales with problems, Bernanke is the great white whale.

    Comment by vbounded — May 10, 2012 @ 7:00 pm

  3. Unfortunately Volcker rule will not get rid of the too big to fail issue which is the root of all this. Obama will never get the fact the best way to attack tbtf would be to get rid of some of the onerous regulations.

    Comment by Surya — May 10, 2012 @ 8:26 pm

  4. I agree that Volcker Rule will not be constructive, and will not address TBTF. Indeed, I think it will be counterproductive. Which is exactly why this is so infuriating and why every bank CEO is hating Dimon with the heat of 1000 suns right now.

    The ProfessorComment by The Professor — May 10, 2012 @ 8:31 pm

  5. The oldest joke in the pink sheets market:

    Broker: abc is at .10, buy some?
    Customer: sure, by 100,00 At .10.

    Two hours later

    Broker: abc is at .40, you want to lighten up?
    Customer: This is the best trade I have had in years , by 100,00 At .45. and another 200,000 if it breaks .50!

    Two hours later

    Broker: abc is indicated at .90,
    Customer: Time to unload this dog – Sell!
    Broker: To whom?

    Believe it or not something eerily like this actually took place with a friend who was a technician (who made money!!!) in the 70’s. He got a call from his block desk asking what the hell was going on with X. Looking at the chart he noted that there had been recent support at 24, having hit that level several time then bouncing up to 24 3/4. three or four times during the week. Suddenly, however it broke down below 24, initially on light volume, followed by a block of sales at 23 3/4 or lower. Asked what happened he said that it looked like there had been a large, badly executed buy program between 24 and 24 1/2, that a lot of people had figured it out and were riding along on the trade. Then, predictably, when the program ended, all the free riders had to dump once the artificial support went away. Asking the desk if they knew who the big stupid buyer was, they said yes, they were the buyer.

    Comment by sotos — May 10, 2012 @ 8:39 pm

  6. Amen, Sotos. If you are the market, it is time to be afraid. Very afraid.

    The ProfessorComment by The Professor — May 10, 2012 @ 9:01 pm

  7. One is reminded of Marlowe’s Doctor Faustus.

    Comment by markets.aurelius — May 11, 2012 @ 8:21 am

  8. […] I’m right right? Mission accomplished. You LOSE Volcker Rule. I win. 1 to nothing. But as Craig Pirrong astutely points out, this whole losing-$2-billion thing may put a damper on my side of the […]

    Pingback by I’m Pretty Sure JP Morgan Lost $2 Billion Just To Spite Me « Rhymes With Cars & Girls — May 11, 2012 @ 9:41 am

  9. Rule #1 in the financial markets: There’s always room under the bus. Congrats, SP, on being first quoted in one of the bbg top stories on this.

    Comment by dh — May 14, 2012 @ 6:10 pm

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