Thursday, May 17, 2012
"It was just a dumb trade?"
This week JP Morgan announced that the broker-trader in London named "The Whale" had done a dumb trade that was going to cost the firm 2 BILLION dollars, but could cost more....the next day, they announced that the loss was more like 3 BILLION dollars...but could be more...Jamie Dimon, the chairman of JP Morgan was on the hotseat, and at the annual meeting, there was a vote on whether he should be removed...How could this have happened? He is so meticulous and such a wonderful leader and all....yada yada yada Every hedge that involves two options, maybe one a call and one a put, the net of the two is the NET risk of the trade---BUT if one of the two options becomes ILLIQUID or aka "WORTHLESS" then all bets are off as to the result of the trades....and the risk of that happening is NOT reflected in any data that a president of a firm would have....and there are tons of leveraged derivative "Hedges" out there that involve the European Union...and guess what, they are denominated in euros, and what happens when everyone reverts to their own currancy? In summary, the present assessment of risk by firms is a complete fiction...and is going to end badly. In summary....this was not a "dumb trade"---that is just a smoke screen public relations comment. What is crystal clear is that we need to revert back to Glass Steegal rules that were abandoned....or beware of the coming results.
Posted by Richard Woulfe at 7:37 PM