Bloomberg News

Swaps Index Traded by London Whale Shrinks as JPMorgan Unwinds

July 03, 2012

Positions in the credit derivatives index said to contribute to JPMorgan Chase & Co. (JPM:US)’s $2 billion loss fell last week to the lowest in five months as the bank and hedge funds trading against it unwind bets.

The net amount of credit protection bought or sold through Series 9 of the Markit CDX North America Investment Grade Index fell 4.3 percent to $118.7 billion in the week ended June 29, the least outstanding since the period ended Jan. 27, according to the Depository Trust & Clearing Corp. The so-called net notional outstanding surged an unprecedented 67 percent to $150 billion in the 17 weeks ended April 27 as JPMorgan trader Bruno Iksil was said to have amassed a position in the index so large it distorted the market, earning him the nickname the London Whale.

JPMorgan is seeking to stem losses from trades by its chief investment office in London, where Iksil managed a portfolio of credit derivatives, which was first reported by Bloomberg News on April 5. The CIO’s strategy to reduce risks from hedges backfired and left the bank with even bigger and harder-to- manage exposures, Chief Executive Officer Jamie Dimon said last month before the Senate Banking Committee.

The index tracks credit swaps tied to 121 companies, all of which were investment grade more than four years ago, including now junk-rated bond guarantor MBIA Insurance Corp. and mortgage insurer Radian Group Inc.

Biggest Winner

At the same time Iksil was said to have been building positions, hedge funds and other market participants were taking the opposite bets, people familiar with the trades said at the time.

Andrew Feldstein, a former JPMorgan executive who helped the company create the credit-derivatives market, was among fund managers who bet against the bank (JPM:US), before helping it unwind more than $20 billion of trades. BlueMountain Capital Management LLC stands to make as much as $300 million, said market participants familiar with the transactions.

The trades, first reported by Bloomberg News on June 20, are among those that may have helped reduce the bank’s exposure to the index by more than half, according to estimates from market participants familiar with trading activity.

Saba Capital Management LP, Hutchin Hill Capital LP, and BlueCrest Capital Management LLP also profited from the dislocations, according to people familiar with the trades. Saba and Hutchin Hill have closed out their positions.

Charles Peabody, an analyst with Portales Partners LLC in New York, estimated the amount has grown to between $4 billion and $5 billion. The company is scheduled to disclose details about its losses and its progress unwinding the trades when it reports earnings on July 13.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • JPM
    (JPMorgan Chase & Co)
    • $60.43 USD
    • 1.04
    • 1.72%
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