20120613-074756.jpgArticle of the day link: Well obviously.

He was hardly going to tell Congress that the trading loss was entirely expected and hum-drum. Except that it is. Because losses, when you play in markets, well they happen. And calling a loss an “aberration” is much like calling a loss a “loss”. I mean – if you’re planning a market move, you’re hardly about to take a position that you expect to lose on… By your own perspective, any position that loses you money is an aberration*.

According to JD, the CIO** traders didn’t understand the risks they were taking, which unfortunately led to him testifying in front of Congress. And when they began to experience losses aberrations, they “incorrectly concluded that those [losses aberrations] were the result of anomalous and temporary market movements***”.

Also according to JD, the reason that a hedging position got so out of hand was because the bank instructed its CIO to reduce its risk-weighted assets in preparation of new international capital rules****. There are two ways to read that:

  1. We need to reduce the risk-weighted assets; or
  2. We need to reduce the weight of the assets in terms of risk.

Point 1 implies a liquidation of positions. Point 2 implies taking a few more off-setting positions.

In other words: point 1 is going on a diet in order to lose some weight; point 2 is eating more food in order to have more energy in order to do more exercise in order to lose some weight.

Both can work [in principle]. Unfortunately, whilst point 2 has the attraction of more eating more food*****, it also carries the “misunderstood” risk that people are overall more likely to not exercise.

Of course, if you’re going to follow that route, you should probably have a fitness trainer. Unfortunately, as Mr D points out: “The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed [outside the division].”

JPM is now struggling to lose the risk-weight because its positions have gotten so large. Which is an unfortunate consequence of getting too large. As is people calling you all kinds of nasty names like “the London Whale”.

Time for Fat Camp.

*ie. “Oh bugger. Didn’t see that coming! [Copulate] me. These aberrations these days”

**Chief Investment Office

***ie. “They erroneously concluded that the aberrations were the result of aberrations”. That’s not erroneous – it’s just redundant. The erroneous part was concluding that the aberrations were “temporary” [which is a general term for “expected to reverse before the end of the quarter”].

****In accordance with Basel number-something – I think it’s number 3.

*****And probably, more bonuses.