John Carney has hilariously convinced a bunch of people that JPMorgan whale-wizard Bruno Iksil could actually be running a synthetic bank on top of JPMorgan's actual bank. The theory, propounded to him by a mysterious trader and sort of supported by an old PIMCO client note, is that Iksil was tasked with hedging JPMorgan's inflation risk and did so by putting on a trade that was (1) long TIPS (for the inflation) + (2) long [write protection on] CDX (for the yield). Now I will tell you a thing, which is that I hedge my inflation risk by being (1) long TIPS (for the inflation) + (2) long MegaMillions tickets (for the yield),* but nobody calls me Voldemort. Here is Doug Braunstein's theory about Iksil: On a conference call with analysts, Braunstein said the positions are meant to hedge investments the bank makes in “very high grade” securities with excess deposits. (J.P. Morgan has some $1.1 trillion in worldwide deposits.) Braunstein said the CIO positions are meant to offset the risk of a “stress-loss” in that credit portfolio. He added the CIO position is made in line with the bank’s overall risk strategy. What can that mean? Presumably the sensible view to take from this is that this is actually part of a "stress-loss" hedge; the CIO is short (bought protection on) a lot of shorter-dated corporate credit and funds it by being long (selling protection on) a lot of longer-dated (5-year) corporate credit, so as to be relatively DV01-neutral but long jump risk. This has the advantage of (1) actually hedging a stress loss in high-grade short-term corporate securities, (2) fitting in with the relative lack of noise in the CIO portfolio,** (3) being what people have told Bloomberg he was doing, and (4) being what JPMorgan has actually said it's actually done in the CIO during the crisis. So it's probably true no? But it's fun to pretend! If you pretend Carney is right you can have one of two views.*** One is Izabella Kaminska's, which is "sure, I guess this is a hedge, but boy is it a mysterious one." You can buy this if you have - as she does - a pretty postmodernist view of what a hedge is. I do too, mostly.

Do you think that Bruno Iksil, when he woke up in Paris on Friday looking forward to trading from home in his black jeans, expected to become an international celebrity? The evidence suggests not. You may remember Iksil - possibly under other names like "Voldemort" or "the London Whale™" as the JPMorgan chief investment office trader who has sold protection on $100bn of notional of a CDX investment grade index to ... hedge ... JPMorgan's massive short position in credit ... or ... something?* Anyway a lot of people are mad at him because that's just too much protection to sell on that index and so they are complaining to Bloomberg and the Journal about how he is manipulating the market and also taking huge proprietary risks with JPMorgan capital that should obvs be regulated out of existence. This is weird in a lot of ways but one of them is that you can distill a lot of the Volcker-Rule complaints into "my God, you're telling me that JPMorgan is exposed to $100bn of credit risk on investment-grade debt issued by a diverse mix of 121 U.S. companies!?" No! JPMorgan is exposed to something like $750bn of credit risk on debt issued by a diverse mix of companies. Some of it's non-US. Some of it's not even investment grade. And that's just in its loan book.** Is writing $100bn of protection on the CDX.IG.NA.9 a terrible risk to take with investor and depositor and government-backstop money? Well, define "terrible risk." It's certainly less risky than operating the rest of JPMorgan.***

There are a lot of things that, if you wanted to, you could legitimately blame on former JP Morgan employee London P. Whale. The $6.2 billion trading loss the bank incurred over the summer. Ina Drew getting fired. This awkward phone call. Some stuff you can't pin on him, though many have tried: male pattern baldness, the bombing of Pearl Harbor, Apple Maps, Lehman Brothers' bankruptcy, tempting as it may be.

Did Bruno Iksil make the bank -$2 billion? -$9 billion? -$20 billion? Was this all just a hoax and he actually didn't lose any money at all? JPMorgan will let us know tomorrow at 7AM. Standard Price Is Right rules, closest without going over. Guesses in by 4PM today. Winner will receive his or her choice of a visit from the sandwich fairy, a highly coveted whale bath toy, or an I heart Dealbreaker button.

Despite Jamie Dimon's promise that JPMorgan will be "solidly profitable" for the quarter, some are skeptical given the growing estimates of Whale-boy's losses. According Mike Mayo, the bank "will only make $727 million...including $4 billion of losses in the unit that made the bungled bet [though] if the losses exceed $5 billion, JPMorgan could make an overall loss." Barclays' Jason Goldberg thinks things are gonna be okay here, and sees the bank making $3.3 billion, assuming you know who will have only lost it $3 billion when all is said and done. And yourselves? Start considering your predictions now, as come July 13, there will be a visit from the Sandwich Fairy and a coveted bath toy for whoever comes closest without going over. Will The Whale Swallow JPMorgan's Second-Quarter Earnings [Dealbook]