The Real Story Behind JPMorgan's Infamous "Whale" Trade

Here's an insight for you - along with a trademark indictment, of course.

Take it with a grain of salt, because it's just an educated guess on my part.

It's about how the infamous London Whale may have been harpooned by spawn from his own pod.

For those who haven't heard, the London Whale is one of the latest traders to make the headlines. Bruno Iksil was the top trader at JPMorgan Chase's Chief Investment Office (CIO) in London.

He got the nickname "the London Whale" for the outsized bets he became known for.

But this is no fish story...

Last year JP Morgan's Chief Investment Office bet the house. They invested untold billions of dollars of the bank's excess money - mostly depositors' dough it hadn't lent out - by putting on a whale-sized trade in credit derivatives.

The bank's loss on that trade is over $6.2 billion... and counting.

Now, it appears that, besides the lucky hedge funds on the other side of the Whale's bleeding bet, there were JPMorgan traders elsewhere in the bank betting against the Whale's position.

According to Reuters on Tuesday, "The U.S. Senate Permanent Committee on Investigations, which launched an inquiry into the trading loss last fall, is looking into the how different divisions of the bank wound up on opposite sides of the same trade, said one of the people familiar with the matter."

Now, here's where my educated guess comes in: It's highly unlikely - near impossible - for a desk to allow a big dog trader's big positions to be offset by any other trader(s) on the same desk - or under the same boss - unless it is agreed on that they work together to hedge the position.

Small opposing positions might be taken by traders on the same desk, sure, because traders make their own profit and loss (P/L) on the desk. But offsetting, or "netting" out, the big dog's play? No way.

That never happens - unless it happens by agreement.

For example: In the mid-eighties I was hired out of Chicago - because of my reputation as a hedge trader - by Lloyds Bank to hedge the Bank's government desk, their currency desk and their special products (derivatives) desk.

One by one, in succession, the heads of the government desk, then the currency desk, then the derivatives desk, all took me out to lunch. They said, "Sorry, nothing personal, but we're not going to work with you, ever. We will shut down the Treasury Department (meaning they had all decided to leave and cripple the Bank!) before we do that. We run our own books, and if we think we're overexposed, we'll sell our positions or do what we want to do. We're not going to have our bonuses subjected to the idiots in management."

They won. That tells you about where the power really resides in banks. Management apologized to me for putting me in the middle of their power struggle and gave me my own desk and said, "Trade whatever you want. You have your own P/L."

What appears to have happened at JPMorgan Chase is that the counter trades took place in a separate area (desk) with its own P/L, where those traders "faded" the Whale - whose positions they should never have been privy to.

In other words, they were padding their own P/L for their bonus pool (probably) by leaking the Whale's position to Blue Mountain, Saba, etc. Then, they could bet against the Whale's position and actually bust his book to make a ton of money on their trades.

Now that is unusual - at least to the degree that it "might" have happened.

But it goes to show how cutthroat Wall Street can be - and that it's every man for himself.

I'd be willing to bet (well, maybe not after this article), that if any of those JPM traders gets fired, they're going to Blue Mountain or Saba or any of the other six or so desks they helped make a profit on the fade trade.

Welcome to Too Big To Be Legit.

Did I say that I was just guessing? Well, I am. I'm a trader. I'm just "speculating."

But, if it walks like a duck...


About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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