• 12 Oct 2012 at 5:05 PM
  • Banks

London Whale Swims Off Into The Sunset

Hi Whale! I told you you were not forgotten. Not understood, either, but not forgotten.

The London Whale now goes by the less adorable name “synthetic credit portfolio,” since all mammalian representatives of that portfolio have left for non-extradition countries. That is descriptive enough, or so I would have thought; my rough model of the London Whale position was a combination of basically long IG index synthetic credit by selling protection on 10-year CDX.NA.IG.9, untranched or senior tranches, and short higher-beta synthetic credit bits by buying protection on high-yield indices, junior tranches, something like that.

But it’s also possible that the London Whale position is basically a blob of green glowing radioactive material that just deals indiscriminate pain everywhere it goes. So, for instance, this quarter, after causing massive and time-traveling losses last quarter and being mostly unwound and/or moved from the Chief Investment Office to the investment bank, it still managed to lose money in not one but two places – the investment bank, where the bulk of its ominously pulsing self “experienced a modest loss,”1 but also the CIO, where its mangled remnants lost $449 million on about a $12bn notional remaining position, or about 3.75% of quarter-initial notional.2

You can think a range of cynical things here. The most supportable, perhaps, is that CIO’s daily VaR was $54mm last quarter3, meaning that the CIO’s loss this quarter was a little over 8x its daily VaR, which is, um, high? A quarter is 65ish trading days; if you assume VaR goes with the square root of time then CIO’s quarterly 95%-confidence-interval VaR was about, oh call it $449 million, meaning roughly that 95% of the time it would have lost less than it did, yet here we are. Of course there’s the other 5% of the time, where the whale seems to live, but … I mean, that is an odd number and might make you quietly ponder JPMorgan’s new VaR model.4 BONUS FOOTNOTE!5

But the main thing to notice is this:

That is: the thing that the Whale sort of publicly “lost money on,” that is, selling protection on investment grade credit indices, made money this quarter. And yet the Whale … lost money again.

Trying to understand exactly what is up with the whalefolio will drive you mad, so don’t, though you could start here. But the simple directional view would be:
(1) Once there was a whale who bought a lot of credit protection to hedge his bank’s credit risk.
(2) Later he went crazy and sold a lot more credit protection to hedge that hedge, somehow accidentally ending up massively long credit.
(3) Then he lost money, in part on credit moving against him and likely in larger part on second-order stuff – convexity, liquidity, dolphins – moving against him.
(4) Then he got rid of all that long credit stuff and ended back where he started, owning a lot of credit protection to hedge his bank’s credit risk.

That, y’know, makes sense, because the whale’s original job was to hedge JPMorgan’s credit risk. And one thing that happens when you hedge credit risk is that, in an environment where JPMorgan is breaking records and credit is tightening, you will be caressed by a few gentle pleasant headwinds, and one of those will be that your hedges lose money.6 And, if you are a gigantic too-big-to-whatever bank with huge exposure to corporate credit in a quarter that has been world-historically kind to corporate credit, you might say something like, “yes, that is great, losing half a yard on credit hedges now is just fine, because we want our hedge position to be there when the hard times come.”

Except they’re unwinding the position as fast as they can. So, yeah. We’ll miss you Whale!

1. Page 3 of the earnings release. That loss was not quantified. The IB synthetic credit bulk wasn’t quantified either, in terms of notional, though JPM has said that it’s $30bn of risk-weighted assets.

2. Page 13 of the earnings presentation has the loss; note (f) on page 10 of this quarter’s supplement has the initial notional. Though those remnants were also “effectively closed out this quarter” (again p. 13 of the presentation), so I guess current notional is ~0 and the loss is like 7.5% of average notional? That’s maybe a silly way to think.

3. 95% confidence VaR, from page 42 of the supp.

4. Umm! I have little confidence in the mathematical fakery in that paragraph but I think it’s baaaasically in the ballpark. Tell me if you disagree, but only in like a “VaR doesn’t go with sqrt(T)” or “you are not accounting for risky drift which is material” way, not in a like “one-tailed vs. two-tailed” or “VaR includes weekends” way, I don’t care about that. I suppose the most important objection is “CIO VaR” is, like, not just the synthetic credit portfolio, diversification blah blah blah, but, I dunno, still seems fishy. Note footnote (f) on page 42 of the supp, which says that their new model makes the portfolio VaR even lower, though in a way not totally clear to me.

5. Other, less supportable cynical thoughts might run to “why didn’t you just write the Whale stuff down excessively last quarter, when you were taking a galumphing embarrassing write-off anyway, so you could cheerfully announce a gain this quarter?” Your cynicism about that basic method of earnings management might be widely shared, but I guess you can’t really mismark the portfolio that you’re being criminally investigated for mismarking, even to mark it too far down.

6. Another is DVA.

18 comments (hidden to protect delicate sensibilities)
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Comments (18)

  1. Posted by DB IT Hamster | October 12, 2012 at 5:21 PM

    Just fuckin' with y'all.

  2. Posted by CpnNemo | October 12, 2012 at 5:24 PM

    Matt, while I love your articles, you're wrong to associate the London Whale with the killer whale. Killer whales are actually dolphins, not whales.

  3. Posted by Alt_EST | October 12, 2012 at 5:32 PM

    An ''ominous…pulsing…green blob of glowing radioactive material that just deals indiscriminate pain everywhere it goes?" I resemble that remark!

    -John Paulson's Investment Portfolio in the Voice of Curly from The Three Stooges

  4. Posted by Enough | October 12, 2012 at 5:42 PM

    Much like anything signed "UBS MD"….London Whale has…
    http://www.youtube.com/watch?v=MpraJYnbVtE

  5. Posted by VonSloneker | October 12, 2012 at 5:43 PM

    Pedant…

    – Flipper*

    * No one you see, is smarter than me

  6. Posted by kim | October 12, 2012 at 6:45 PM

    Matt, some people love you and appreciate your efforts.

    Love,

    Kim

  7. Posted by Matt's Mom | October 12, 2012 at 7:55 PM

    Stay away from him, you little bitch.

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    I haven't been to a singles bar in years, but I bet

    "[I go] long IG index synthetic credit by selling protection on 10-year CDX.NA.IG.9, untranched or senior tranches, and short higher-beta synthetic credit bits by buying protection on high-yield indices, junior tranches"

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  10. Posted by Credit eye | October 15, 2012 at 12:59 AM

    Superb piece Matt…love your articles

  11. Posted by long'un | October 15, 2012 at 7:34 AM

    Um..

  12. Posted by hypotheticals | October 15, 2012 at 1:41 PM

    Levine… On the mark of the whale portfolio… at 2Q JPM noted that they had moved much of the postion to the Investment Bank. Given that this was inter-division, it might be standard course that they moved the position at a price at which the Investment Bank was prepared to acquire the position. Now, if I were the buyer, I would probably want a significant discount to take on a large, relatively public, illiquid position… which hypothetically would create your large mark down and help you have a relatively strong quarter in the I-Bank in 3Q.

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  16. Posted by jack loach | December 15, 2013 at 5:42 PM

    Update —- Dec. 15th– 2013.

    Pictet & Cie Bank
    List of Crimes.
    1996 — F.S.A. — Breach in London.
    2003 — F.S.A. — States
    Rogues were operating in Pictet’s London offices.
    Ivan Pictet states that documents were forgeries but were later proved to be genuine in the British Courts. ( Ivan Pictet a proven liar.). He had documents destroyed in their London office – hoping to hide the crimes.
    2007 — The Securities&Exchange Surveillance ( Japan.)
    Issued a recommendation that the Prime Minister and the Commissioner of the F.S.A. to take disciplinary action against Pictet Asset Management – Japan Ltd.
    2008 — Dec. — Pictet Bank state – “ We have never chosen any funds linked to MADOFF.
    2011 – Madoff Trustees sue Pictet & Cie. Bank . for $156,000,000. ( They lied again.)
    2011 — Pictet & Cie bank abetted a Bribery Scheme. — Oil Company sues Pictet Bank for — $350,000,000.
    2012 — April.—Pictet & Cie, Bank .Geneva implicated in offshore Tax Scheme. –USA .
    2012 — June. — Published in Anglo INFO. Geneva, —- USA Trust Fund were sent false and fraudulent documents by Pictet Bank in order to collect large fees.
    (Like MADOFF). – Even after the SEC in the USA had uncovered the fraud Pictet Bank continued to charge fees and drain whatever was left in these accounts.
    Estimated that – $90,000,000 was lost in this Pictet Ponzi Scheme.
    2012 — July — German paper –De – Spiegel — states — Pictet Bank uses a letterbox company in Panama and a tax loophole involving investments in London to lure/gain German Millionaires as clients.
    2012 — August. — German Oppositon Leader accuses Swiss Banks of “ organised crime”.
    2013 — Swiss M.P.’s table motion to freeze Tiab Mahmuds assets of “ criminal origins” held in Swiss banks — $18,000,000 held in five accounts at Pictet & Cie Bank . Bahamas.
    2013 — Feb. — The bank is now seeking to re-structure — to cut the partners liability ( not to risk their ill gotten personal wealth.) — hoping to offload the decades of criminal responsibility. ( Some listed above.)
    The Germans are right – the bankers should go to prison if found guilty of financial crimes. ( Madoff got 150 years in prison — surely the Pictet Bank’s partners should go to jail.)
    Ironically the Pictet & Cie .Bank partners are bigger criminals than the criminals who have accounts in their bank. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

  17. Posted by jack loach | December 15, 2013 at 5:44 PM

    Update —- Dec. 15th– 2013.

    Pictet & Cie Bank.— Partners —– ( 1996—2013)—Guilty.
    Peters & Peters — Partners —— (1996 — 2013) —Guilty.

    The bank and it’s officials/lawyers deliberately withheld crucial documents requested under a High Court Order. The bank and it’s officials/lawyers deliberately held evidence from the police/courts.
    One of Pictet’s accounts managers SUSAN BROADHEAD gave a false witness statement to the police. The banks Head of Alternative Investments concocted a letter pretending to be a client and closed his account.
    The senior partner ( IVAN PICTET) sought to have numerous documents destroyed along with copies held in their London Office’s of Pictet Asset Management. Initially stating that they were forgeries.
    Their lawyers PETERS & PETERS —– re MONTY RAPHAEL.Q.C. and the barrister CHARLES FLINT. Q.C. later had to admit in Court that the documents were indeed genuine.
    British Parliament. Hansard.
    Barry Sheerman .M.P. — quote:
    “ Constituents of mine have lost £2,000,000. through fraud. The fraudster used Pictet & Cie – a French Bank – and Pictet Asset Management to back the fraud being perpetrated”.
    Both Ivan Pictet and Monty Raphael Q.C. conspired to withhold crucial documents requested by the High Court —- the F.S.A —– and the Police Fraud Squad.
    Written Parliamentary Questions received by the table office.
    (1) To ask the secretary of state what steps he is taking to ensure that Swiss Banks such as Pictet & Cie do not evade criminal prosecution under EU law even when the illegal act is committed by a London based subsidiary.
    (2) To ask the secretary of state what steps he is taking mto protect the rights of UK citizens who seek redress following criminal activities by Swiss banks with subsidiary offices located in London.
    – – – – – – – – – – – – – – – .
    The consensus of opinion is that Pictet & Cie bank should be prosecuted, and that their U.K. Banking licence should be taken away.
    Their Solicitors at Peters & Peters.London. – “ Struck off and prosecuted.
    In America they would have all been in prison for the last seven years.

    Full Story. —– Google or Yahoo.
    Ivan Pictet. Banker.
    Charles Pictet. Banker.
    Nicolas Pictet. Banker.
    Renaud de Plant. Banker.
    Francois DeMole. Banker.
    Jacques de Saussure. Banker.
    Philippe Bertherat. Banker.
    Monty Raphael Q.C.

    Also view “ images” section.

    For several years we placed the following on hundreds of media sites —
    *** Were currently waiting to see if the West Yorkshire Police :-
    (1)Chief Constable —- Sir Norman Bettison.
    (2)Forces Solicitor —- Mike Percival.
    (3)Head of Economic Crimes Unit.— Det. Chief Inspector Steven Taylor.
    — continue to attempt to cover this case up like their F.S.A. Counterparts.
    We can now confirm that all three of West Yorkshire’s senior police officials have all been removed from their posts and facing criminal allegations.

  18. Posted by jack loach | December 15, 2013 at 5:44 PM

    Sods —- Law.

    Dec. 2013.

    For almost two decades we have strived to get justice for the injustice we have suffered at the hands of a world renowned bank .

    Two Yorkshire men both running their own family businesses trying to resolve the problem by taking the correct legal procedures to recover their monies.

    The matter was raised in parliament –twice – the FSA investigated the matter concluding that the bank had rogues operating in their London Bank — but the rogues had left — so there.

    We then approached the Financial Ombudsman Service – our case was dealt with by seven different people —- then numerous E-Mails were ignored — nobody would speak to us. – so there.

    We then asked the SFO ( Serious Fraud Office) to investigate our case
    — the criteria of our case ticked all their boxes — we were instructed not to send down any documents / evidence — in fact they wrote to us advising us to go to the Citizen’s Advice Bureau. ( CAB) .

    RICHARD ALDERMAN ( The Boss) —- who responded to our letter was the man who would not investigate the “ Madoff “ scandal or the “Libor” fiasco. The MP’S committee —– said he was sloppy — and the SFO was run like “ Fred Karno’s Circus. —– so there.

    Our M.P. approached our local Chief Constable to investigate – our West
    Yorkshire Police Force — made “ Dad’s Army” look like the S.A.S.
    Inept , corrupt – from top to bottom. We were criminally dealt with by the Forces Solicitor — the Head of the Economic Crime Unit — and the Chief Constable — one SIR NORMAN BETTISON. —- so there.

    We then were advised to pass our complaint against West Yorkshire Police to the I.P.C.C.— which we did — they instructed the West Yorkshire Police to look into our complaint. —-so there.

    Sir Norman Bettison —and the Forces Solicitor –and the Head of the Economic Crime Unit – all removed from their posts and facing criminal allegatioins. — So there

    We even sought justice through the Courts , culminating in a visit to the Court of Appeal. London. On leaving the Court of Appeal that day our barrister ( a rising star ) informed us that if that was justice then they can keep it. He quit the law and moved to Canada.—-so there.

    We learned a few years later that one of the judge’s in our case at the Courts of Appeal was related to a senior executive of the Bank.—so there.

    The Bank —- PICTET & CIE.. London. — Geneva.
    Voted private bank of the year —2013.
    IVAN PICTET —- the senior partner — lied on numerous occasions and had documents destroyed — said genuine documents were forgeries.
    2012—Voted Banker of the Year.
    Oct 2013 — Given the LEGION of HONOUR — so there

    But saying that honours were given to Hitler—Eichmann— Mussolini —
    Franco – he’s in fitting company. —- so there.

    MONTY RAPHAEL –Peters & Peters. London were the banks lawyers.
    He along with Ivan Pictet withheld crucial documents requested by the High Court —- the FSA and the police Fraud Squad.

    Monty Raphael became an Honorary Queens Counsellor. ( Q.C.) in March.2012 —- made Master of the Bench in Nov.2012 .
    An expert in Fraud – the Doyen of Fraud Lawyers – so there.

    This says a lot about Banks —- the consensus of opinion is that they are highly paid “crooks” — no wonder they voted Ivan Pictet banker of the year .

    Full Story —-“ google or yahoo”

    Ivan Pictet. Banker.
    Monty Raphael.Q.C.
    Ivan Pictet/Monty Raphael.