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JP Morgan Chase is an American multinational banking and financial services company that was founded in the year 2000. It provides different financial services in different countries around the world. The company has total assets of US $2.515 trillion that makes it one of the four largest banks in the United States. The firm has been accused on several occasions for engaging in unethical financial activities that had adverse financial implications on the economy and the financial wellbeing of its shareholders (Weinschenk par. 3).
One such incident was the 2012 trading loss that involved its London branch. The scandal involved a series of derivative transactions involving credit default swaps that led to an estimated loss of several billions of dollars. The scandal tarnished the reputation of the bank and resulted in huge financial losses totaling approximately $6 billion (Weinschenk par. 3). The huge losses resulted from the use of a weak, complex, unmonitored, and poorly executed trading strategy.
In 2012, JP Morgan Chase reported huge financial losses that originated from a trading strategy used by one of its traders in its London branch. The trader was known as Bruno Iksil and nicknamed the London Whale (Hurtado par. 2). In February 2012, it was discovered that the market in credit default swaps was overly active due to aggressive trading activities that were apparently affecting its effectiveness (Weinschenk par. 5). The trades involved huge bets that disregarded the market’s high risks.
Investigations into the matter revealed that the unusual trading activities were being executed by Bruno Iksil, who was a trader at JP Morgan Chase. In order to conceal the unusual trading activities, a certain trading branch of the firm purchased the derivatives that the bank was selling in high numbers (Hurtado par. 4). The bank denied allegations that it was participating in the aforementioned trades that led to huge losses. Iksil trading strategy involved placing bigger bets in order to cover up losses on previous trades.
Prior to the incident, the risk level was hinged on $350 billion investment money the bank held (Melendez par. 5). The London market was focused on complex derivative trade that was highly profitable. For example, Iksil executed a trade that raked in $400 million for the bank. Iksil’s trades were known to the bank and existed even before the 2012 debacle.
However, in 2012, the bank made bets that exceeded its risk limit, thus making its portfolio too huge to manage and monitor (Weinschenk par. 7). In due time, Iksil’s positions became so huge that they caused financial disruptions in his markets. Eventually, the trades collapsed and initiated investigations into the incident.
Iksil’s trading strategy
Iksil’s trading strategy had three major components. The first component involved the purchase of credit default swaps (CDS) on bonds that were projected to yield high returns (Rimkus par. 4). The bank would rake in profits if the bonds depreciated in value. The second component involved the writing of CDX.NA.IG.9 swaps that were aimed at hedging the CDS on high-yield bonds (Rimkus par. 4). The third component involved the purchase of CDS on investment-grade bonds (Rimkus par. 5).
The second package was created due to the performance of the first package on high-yield bonds. The trading strategy was affected by the poor performance of the first and second components. Instead of Iksil terminating the trades, he used the third component to make up for losses experienced in the first two components (Rimkus par. 7). Several predictions and explanations were issued regarding the trading.
Some analysts argued that the Iksil executed the trades in hopes that the bonds market would move in a certain direction, while others argue that he was interested in interest rates changes. The strategy went wrong because other traders were angered by the huge bets Iksil was placing.
After revelations of the trade activities, the market got eve, and the spread JP Morgan chase was projecting to make millions in profits evaporated (Melendez par. 9). The positions taken by Iksil collapsed when they became too huge to find parties to counter the huge bets he had placed. The bets were so huge that it was apparent that the London Whale did not have adequate liquidity to make an exit from the loss generating trades.
The 2012 JP Morgan Chase financial debacle resulted in losses of more than $6 billion. The situation started after traders complained that a JP Morgan Chase trader was placing huge bets that were affecting the market. Investigations revealed that unusual trading activities were being executed by Bruno Iksil. These activities earned Iksil the nickname “The London Whale.”
The trades were executed on the CDS markets in the hope that the corporate bonds markets would improve and result in high prices. However, the revelation made the market even, and the bets got so high that counters to the bets were unavailable. The bank had to take a hit and embrace huge losses because the bets were so high that they exceeded the bank’s risk tolerance level.
Hurtado, Patricia. The London Whale. 2014. Web.
Malendez, Eleazar. How did JP Morgan Lose Billions in One Trade? London Whale Explained. 2012. Web.
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Rimkus, Ron. JP Morgan Chase and the London Whale: Understanding the Hedge that Wasn’t. 2014. Web.
Weinschenk, Matthew. How JP Morgan’s “London Whale” Lost $2 Billion. 2012. Web.