Index Traded By Iksil Shrinks as Dimon Seeks to Stem Loss

JPMorgan CEO Jamie Dimon
Jamie Dimon, chief executive officer of JPMorgan Chase & Co., speaks during a Senate Banking Committee hearing in Washington, D.C. on June 13, 2012. Photographer: Andrew Harrer/Bloomberg

Wagers in the credit derivatives index said to contribute to JPMorgan Chase & Co.’s $2 billion loss dropped last week to the lowest in three months in a sign that the biggest U.S. bank and hedge funds trading against it may be unwinding bets.

The net amount of credit protection bought or sold through Series 9 of the Markit CDX North America Investment Grade Index fell 7.5 percent to $138.4 billion in the week ended June 8, the biggest drop since July, 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.

JPMorgan is seeking to stem losses from trades by its chief investment office, where Iksil managed a portfolio of credit derivatives. A strategy by the unit to reduce risks from hedges backfired and left the bank with even bigger and harder-to-manage exposures, Chief Executive Officer Jamie Dimon said today before the Senate Banking Committee in Washington.

“It morphed into something I can’t justify,” Dimon told the panel. “It was just too risky for our company.”

Bloomberg News first reported April 5 that London-based Iksil had taken on positions in the index that were so large he was driving price moves in the $10 trillion credit-default swaps index market, earning him the nickname the London Whale among some counterparties, according to market participants who asked not to be identified because they aren’t authorized to discuss the trades.

Surging Bets

Outstanding trades in the index, which was created in September 2007 and had been decreasingly used before this year, had never climbed above $91 billion in the three years ended Dec. 30, DTCC data show.

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.

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.

Cost Rises

After Dimon disclosed the loss in a May 10 conference call and said it may increase, the contracts on Series 9 of the index expiring in 2017 surged as much as 45.5 basis points to 172 basis points on June 4, according to prices compiled by data provider CMA. That’s 22 basis points more than the increase in the current, most-active version of the index, Series 18.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Dimon declined to discuss details of the trades in his testimony before the Senate today, saying it may expose the bank to even bigger losses.

The chief investment office’s credit derivatives portfolio had been used as a way to hedge against a financial crisis similar to the one in 2008, providing profits to offset losses from JPMorgan’s lending businesses.

The group was ordered to reduce positions in anticipation of new capital requirements, Dimon told the panel. Instead, starting in mid-January, he said, traders in the group “embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones.”

“It should have never gotten to this size,” Dimon told the Senate panel, responding to a question from Senator Kay Hagan, a North Carolina Democrat who asked the banker how large the position had grown.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE