JP Morgan Used “Hedginess” to Engage in Illegal Speculation

Jamie Dimon Thumbs Nose at Volcker Rule by Pretending that Big Speculative Bets are Hedges

Smart people like Sajiat Das, Karl Denninger, Tyler Durden, Nomi Prins, Yves Smith and Janet Tavikoli have all demolished JP Morgan’s argument that its recent multi-billion loss was caused by a hedge gone wrong.

Now, former senior S&L prosecutor – and current professor of economics and law – Bill Black provides a succinct and memorable take-down of the faux hedges:

The claim from out of JPMorgan is nobody was looking very carefully at the supposed hedge, and the hedge didn’t perform to offset losses, instead it increased the losses and increased the losses dramatically. And supposedly, no one was looking, and no one adjusted for this. And they woke up, and they had a $2 billion loss. So that’s the story from JPMorgan [which] doesn’t make sense.


If you have distressed European debt [the underlying asset holding that Dimon against which JPM's so-called "hedge" was made], you’re supposed to have already reserved against the losses in it. So, why hedge the position at all? Just sell it. Get rid of these incredibly risky assets before they can suffer any additional losses. If you’ve already got loss reserves, you don’t even have to recognize a loss, because you’ve already reserved for it. So, you shouldn’t have had to hedge, period.

Second, if you were going to hedge, he should have hedged. And the way you would hedge something like this is to buy a credit default swap protection against the bad assets. That would hedge. In other words, if you lost on the value of the European debt, the credit default swap would go up in value, and you would be protected against loss. Instead, they have allegedly bet in the opposite direction by buying this derivative of a derivative. If the European debt lost value, the derivative of the derivative was also likely to lose value. Well, that’s not a hedge. That’s a double speculation in the same direction. You’re doubling down on the bet.

And the reason you’re calling it a hedge is because it’s illegal, under the Volcker Rule, to speculate in this fashion. So the story coming out of JPMorgan doesn’t make any sense as a financial matter. It seems reasonably clear that this is faux hedges. This is, you know, to hedging like truthiness is to truth. So this is hedginess: not really a hedge, but you call it a hedge to evade the law.


Even when the Volcker Rule was adopted, over their opposition and over the opposition of the Federal Reserve and of Treasury Secretary Timothy Geithner, who remains true to his former boss, Jamie Dimon, after that, they gutted the rule—at least the draft rule to implement the Volcker Rule. And unless it is changed, the Volcker Rule will be essentially unenforceable, because you’re allowed, under the current draft, to simply call something a hedge, even though it operates in the exact opposite of a hedge. And voilà, this hedginess is OK, and the losses just mount up and produce the next disaster.

See this for further details.

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  • Dave Ault

    In China, they would probably march Dimon up to a convenient wall and shoot him for the damage done to an essential economic resource under his watch. If $2 billion or more in acknowledged losses isn’t bad enough, his bank can’t get out of the trade, due to lack of counter-parties in a market they have all but created. Trading losses could get a lot worse. The bank has also lost about $30 billion in stock value. This doesn’t sound as immaterial as Dimon wants us to believe.

    By the way, I’ve read that the hedge funds that man the other side of the JPM speculation expect the government (we taxpayers) to make their bets right if the company can’t. Be warned, they can unwind this trade, even profitably, if the debt situation in Europe improves dramatically, but I do not see that happening anytime soon. Germany is the only European economy in decent shape, while Spain and Italy are nearly in the same boat as Greece. Fundamentally, the bank’s position stands to get much worse with increasing losses. They were trying to artificially lower interest rates on distressed debt by selling derivatives of derivatives and failed miserably. At the least, Dimon should be forced to leave in disgrace and teeth should be implanted into the Volker Rule that was designed to stop just this type of wildly risky trading by big banks.