Thursday, March 21, 2013

Hedge fund manager says JP Morgan's 'Whale' trade was a bet

The Wall Street Journal reports that a well known hedge fund manager says JP Morgan's 'Whale' trade was "not a hedge, it was a bet".

Regular readers know that it was a bet that would not have been taken had JP Morgan been required to provide ultra transparency and disclose on an ongoing basis its current global asset, liability and off-balance sheet exposures.

The bet would not have been taken because JP Morgan would have worried about the market trading against it.  This concern was confirmed by Jamie Dimon's actions when he tried to limit who had access to information about the trade out of concern that it was being leaked to the market.

Boaz Weinstein, a hedge-fund manager who traded opposite J.P. Morgan Chase Co.'s "London Whale," said a Senate report clearly indicates that the losing positions were "not a hedge, it was a bet." 
Asked at a hedge-fund conference in New York Thursday about how he formulated his trading position, Mr. Weinstein, founder of Saba Capital Management L.P., told attendees: "There was one index sitting out there [that] looked like a real mispricing" and "didn't make sense." 
It was an "easy and obvious trade to do," he said in a keynote talk at the Absolute Return Symposium, referring to the bank's outsize positions in an opaque corner of the credit markets that came to light last year....
Regulators and lawmakers have been scrutinizing the bank's trading in derivatives indexes that tracked the health of corporate credit, which ultimately saddled J.P. Morgan with more than $6 billion of losses. 
Regulators have focused on whether the bank was hedging its risks or making big bets on the future cost to insure against defaults by companies in the indexes.
Senators at a hearing last week questioned J.P. Morgan executives about whether the bank would be allowed such trades if new rules and regulations were in place, including the Volcker rule, a part of the Dodd-Frank regulatory overhaul that aims to curb banks from placing bets in the markets with their own money. 
The trades that hurt J.P. Morgan became a rallying cry for supporters of a stronger interpretation of the rule. J.P. Morgan proposed Friday to revamp the way it hedges its positions. 
According to quarterly data from the Federal Reserve, J.P. Morgan sold $101.3 billion more long-dated derivatives insuring against defaults by investment-grade companies as of March 31, 2012 than it had purchased. 
"It appears now that the notional [volume] was over $150 billion," Mr. Weinstein said. 
The Senate investigators said the volume was $157 billion. 
Mr. Weinstein said regulators might want to "have a rule that any time anyone wants to make an investment…. greater than $10 billion, the boss has to sign off on it." 
He added that the J.P. Morgan bets he and others traded against were "probably the largest investment ever in an item" and significant because one entity was "the entire other side of the trade." 
Asked why he didn't make as much money on the trade as some others on the winning side, Mr. Weinstein said he didn't want to put his whole fund into it. "We had quite a large trade on and the risk reward was fantastic. But we don't use leverage in that way."

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