sorry about the disappearing posts; we’re not happy about it either; VaR

  • 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 Read more »