JPMorgan Chase & Co. (JPM:US) may face even bigger losses on faulty bets in credit markets if Europe’s debt crisis worsens, according to one of the hedge funds that took the other side of the trades.
“They’re not out of those positions,” Michael Platt, co- founder and chief executive officer of BlueCrest Capital Management LLP, said today in an interview on Bloomberg Television’s “Inside Track.” “If we end up with a catastrophe in Europe in the short run, they’re probably not positions that anyone would want to have.”
BlueCrest, based in Geneva, manages $32 billion. Platt said a credit fund run by his firm took a “small” position against JPMorgan after finding “anomalies” in the pricing of certain credit derivatives. BlueCrest would make money as the prices corrected, he said.
JPMorgan, the biggest U.S. bank by assets, is seeking to stanch losses in its chief investment office as other hedge funds exploit its money-losing positions by trading in indexes tied to credit-default swaps. New York-based JPMorgan revealed a $2 billion loss on May 10, and CEO Jamie Dimon said it could increase by as much as $1 billion this quarter.
The bank’s positions were built by Bruno Iksil, a JPMorgan trader nicknamed the “London whale” because his bets had become so large, Bloomberg News reported on April 5. Traders on the other side, known as counterparties, say the market has since moved even further against JPMorgan.
Platt said he doubted Dimon’s explanation that the trades had spawned from hedges intended to protect the value of credit assets such as corporate loans.
“I don’t think they could be described in any way as a hedge,” he said. “I think it’s a trading loss. They deliberately put the positions on. The London whale, who has subsequently been harpooned, put the positions on.”
Platt said the crisis in Europe could worsen quickly if Greece leaves the euro, a possibility now being discussed by European politicians.
“The order of events would be Greek exit, shock wave across Europe, massive stress in banks, Spain turns into the battleground for the euro, because of the stresses in their own banking system,” he said. “Then we either get a very swift and strong European solution or we get a hugely disorderly meltdown in Europe.”
Platt, 44, is a former trader for JPMorgan who founded BlueCrest in 2000. He said the hedge fund took its positions against the bank “in the normal course of our business” and “not looking to try and cause them any problem.”
Able to Exit
Dimon, 56, has said JPMorgan is in no rush to unwind the trades, even if adverse market moves produce bigger losses in the short term. Platt said he agrees with that approach.
“They would ultimately be able to exit this position,” he said. “I would be looking, if I was in that position, creatively at finding other avenues to reduce the value at risk of the book.”
At a conference organized by Deutsche Bank AG today Dimon called the trading loss an isolated event and said JPMorgan is making progress in efforts to limit fallout. The positions are “very volatile right now,” though less so than previously, he said, declining to answer a question on how big the loss may get.
To contact the reporters on this story: Erik Schatzker in New York at firstname.lastname@example.org; Stephanie Ruhle in New York at email@example.com
To contact the editor responsible for this story: David Scheer at firstname.lastname@example.org