LONDON, May 23 (IFR) - Official data from the US Federal
Reserve have laid bare the eye-watering size of trading
positions built up by JP Morgan's chief investment office in
synthetic credit indices, raising further questions about risk
management standards at the bank.
According to the figures, which are reported by banks on a
quarterly basis and posted on the Fed's website, JP Morgan's
position in investment-grade credit default swaps jumped
eightfold from a net long of $10 billion notional at the end of
2011 to $84 billion at the end of the first quarter this year.
The Fed data support previous reports about the nature of
the trading strategy that has led to the losses. In
investment-grade CDS with a maturity of one-year or less, JP
Morgan's net short position rocketed from $3.6 billion notional
at the end of September 2011 to $54 billion at the end of the
Over the same period, JP Morgan's long position in
investment grade CDS with a maturity of more than five years
leapt five times from $24 billion to $102 billion (see chart).
"I don't care how big a bank you are, that's still a big
move," said one seasoned credit analyst.
This supports reports from market sources that the CIO
positions were duration-neutral curve flatteners intended to
benefit from credit markets quickly souring. One of the main
strategies is understood to be buying the Markit CDX North
America Investment Grade index Series 9 maturing in December
2012, and selling protection on the same contract maturing in
The size of the positions lends credence to credit experts'
views that it will take JP Morgan a long time to close out the
position, particularly given the illiquidity of the off-the-run
indices that are thought to be involved. It also illustrates
that the CIO will not be able to allow the risk to simply roll
of its books due to the substantial portion of it that is
JP Morgan's chief executive Jamie Dimon said his firm began
closely examining the CIO's controversial trading strategy in
closer detail when large mark-to-market losses - put at $2
billion by Dimon during an analyst call on May 10 - started
appearing in the second quarter.
But the increasing concentration of risk was already
apparent by the end of the first quarter. While the bank had
reduced a long position in high-yield CDS from $54 billion
notional to a short position of $4 billion to the end of March,
its long position in investment-grade CDS had rocketed eight
This dramatic re-jigging of its CDS exposures showed up in
the net amount of CDS protection the firm had sold, which more
than doubled from $65 billion to $148 billion over the same
period, according to the Fed data.
There are even indications that losses had started to
materialise as a result of the bungled trading strategy, which
Dimon said was originally designed to reduce a synthetic credit
portfolio that was hedging JP Morgan against a stressed credit
The Fed filing shows the US bank had negative trading
revenues from credit exposures of $324 million in the first
quarter. It is not clear the CIO's revenues are included in this
figure. However, these are the first losses related to credit
exposures JP Morgan has registered since September 2009, and
contrasts with the $3.4 billion of credit trading revenues it
reported in the final quarter of 2011.
" says that the CIO operations are separate from
trading [from a reporting perspective], but I don't see how they
could be," said the credit analyst.
Questions will be raised about senior management signing off
on a trading strategy that vastly increased the banks' exposure
to a worsening credit environment at a time when other banks
were battening down the hatches.
In stark contrast to JP Morgan, the Fed data show other
major US banks maintained large short positions in
investment-grade credit in expectation of a continuation of the
rocky market environment that persisted throughout the second
half of 2011. All US banks are obliged to report such data to
JP Morgan was a complete outlier among its peers, most of
which decided to load up on investment grade credit protection
in preparation for a deterioration in credit markets
Goldman Sachs, for instance, took almost the polar
opposite position to JP Morgan with a net short of $80 billion
in investment-grade CDS at the end of the first quarter. Other
major dealers were similarly positioned: Citigroup's net
short was $69 billion and Morgan Stanley's was $63
billion. Bank of America ran a relatively flat
investment-grade CDS book, with a net short of $3 billion.
The figures highlight JP Morgan's failure to act at an
earlier stage given the large concentrations of risk it was
accumulating, as well as the inability of regulators to discern
abnormal trading patterns among the piles of data banks already
report to them.