JP Morgan Chase, The “London Whale”, “Voldemort”, And A $2B Loss

This story was interesting.  A trader at JP Morgan Chase lost $2B.

The trader, Bruno Iksil, had amusing nicknames.  He was called “The London Whale” or “Voldemort”.  That’s interesting, that banksters think “Voldemort” is a cute nickname.

How did he lose $2B?  The trader was only supposed to be hedging.

If you hedge, you’re trading huge nominal positions that are supposed to cancel.  It’s very tempting to stop hedging, and start making bets.  If you’re right, you get to keep the profit.  If you’re wrong, you get a bailout.

If Bruno Iksil was running his own small business, there’s no way he would be allowed to take $2B bets.  All of JP Morgan’s assets are placed as collateral, for every trader’s bets.  This enables traders to borrow cheaply to finance their gambling.  This exploits the concept of “too big to fail”.

What was he trading?

The Wall Street Journal has reported that the trader, Bruno Iksil, had been placing bets on an index called “CDX.NA.IG.9″–the largest of a panoply of credit indices produced by data provider Markit.

I’ll translate this into English.

A Credit Default Swap (CDS) is a derivative based on a bond.  A CDS is paid off if the bond defaults.

After the Greek restructuring, there was a controversy over what the exact CDS payout should be.  A group of banksters who were short a lot of CDSs, voted on what the payout should be.  Given that CDS owners got robbed after the Greek restructuring, you’d have to be a fool to buy CDSs.

A CDS is a highly leveraged derivative.  For a CDS on $1B of bonds, the premium might be $10M-$50M/year.

That’s the scam AIG’s CDS desk was running.  They were selling lots of CDSs.  When the economy was booming, they were collecting premiums with no expenses or collateral requirements, making a huge profit.  When the economy crashed, they lost a lot of money.  However, the CDS traders didn’t have to give back the bonuses they made during the boom.  All of AIG was placed as collateral for the CDS trades.  That’s the exact same “too big to fail” scam.  When AIG was bailed out, the money actually went to Goldman Sachs’ creditors, another classic scam.  When Greece was “bailout out”, the money didn’t go to Greece.  The money actually went to the banksters who owned Greek bonds.

A CDS on a single bond is a “first-order derivative”.  It’s one order removed from a tangible asset, one specific bond on a specific corporation.

The “CDX” index is an index of CDSs.  It’s a derivative of a derivative.  That’s a 2nd order derivative.

Bruno Iksil was “placing bets on the CDX index”.  In other words, he was trading calls and puts and futures on the CDX index.  It’s a derivative of the CDX index.  It’s a derivative of a derivative of a derivative.  That’s a 3rd order derivative.

Summarizing, Bruno Iksil was trading 3rd order derivatives.  It’s almost completely removed from tangible assets.  He was pretending to be hedging.  He was actually gambling.

Why do people trade these things?  It comes from the Federal Reserve and negative interest rates.  You can borrow at 0% to buy a bond.  You can borrow at 0% to buy a CDS, in effect borrowing at 0% to buy something where you borrow at 0%.  You can buy futures and options on a CDS index, in effect borrowing at 0% to buy something where you borrow at 0% to buy something where you borrow at 0%.  You’re stacking up leverage on top of leverage on top of leverage.  It’s all fueled by the Federal Reserve credit monopoly, paper money, inflation, and negative real interest rates.

In most years, Bruno Iksil made profits of $100M.  It’s obvious what he was doing.  He was using a trading system where the results were “Make $100M 90% of the time, lose $2B 10% of the time.”  When you’re using options and derivatives, it’s very easy to do such a thing.  It was hidden behind fancy derivatives and calculations, but that’s what he was actually doing.

During that 90% of the time, Bruno Iksil was making a nice salary and bonus.  He doesn’t have to give that back, after losing $2B.  That’s the “advantage” of gambling with other people’s money.

In effect, some of the TARP bailout money paid for Bruno Iksil and his gambling.  If you always get bailed out, why not pursue a system where you make a small profit most of the time, and lose a bundle once in a while?  The banksters set up the system that way, on purpose, because that maximizes the amount they can steal.

For example, if you do nothing but sell unhedged way-out-of-the-money calls and puts, you can do that.  Most of the time, you’ll collect the premium and make a free profit.  Once in awhile you go bankrupt, but you say “Whoops!  Mistakes happen!”  That isn’t exactly what Bruno Iksil did, because that would be too obvious.  It was effectively the same.  It was hidden behind a complex series of 3rd order derivative transactions, “hedged” with some 2nd order and 1st order derivative transactions.  You can’t hedge perfectly.

Bruno Iksil lost $2B of other people’s money.  He was pursuing a system where he made a nice profit most of the time, but once in awhile lost a ton of money.  It’s very easy to do that with derivatives.

Bruno Iksil was trading a 3rd order derivative.  It was completely removed from tangible assets.  It was pure gambling.  It had nothing to do with the productive sector of the economy.  The official excuse is “Blame Bruno Iksil.  He’s just one bad apple.”  The real evils are is paper money, inflation, a central bank credit monopoly, and limited liability incorporation.  As long as those evils continue, banksters will continue to rob other people.  Even if you don’t invest in JP Morgan Chase or bank with them, you’re still financing their theft via inflation and taxes.

There was an amusing conspiracy theory.  This loss could have been swept under the rug.  It could have been buried off-balance-sheet.  This loss was announced to back more complicated regulations.  Complicated regulations ultimately benefit banksters and insiders.  Unless the Federal Reserve is eliminated, all other banking reforms are smoke and mirrors.  The Federal Reserve is one big price-fixing cartel.  The Federal Reserve finances all bankster corruption.  The Federal Reserve is the underlying reason that banksters earn huge salaries, even though they produce nothing useful and actually destroy wealth.

2 Responses to JP Morgan Chase, The “London Whale”, “Voldemort”, And A $2B Loss

  1. Anonymous Coward May 12, 2012 at 7:07 pm

    Mark Knopfler wrote the song “Money For Nothing”.

    Its title seems to concisely summarize your post.

  2. Anonymous Coward May 12, 2012 at 10:37 pm

    Below is the URL of a very, very cool song about other problems with our monetary system and economy. The singer talks about how we are all underpaid and too dependent on bank loans. Also nobody mentions that the solution to high house prices is to lower them, not to think up ways for easier credit.

    There is a lot of information in this song that can be missed. There is just one line saying “private banks print the public money”. This is an important point. Printing money from thin air causes inflation, which is paid by all workers and savers. So why pay interest to banks, when the whole population pays for the new money?

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