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Steven Kiel
Steven Kiel
Articles (136)  | Author's Website |

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June 13, 2012 | About:

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Rating: 3.7/5 (20 votes)

Comments

Josh Zachariah
Josh Zachariah - 5 years ago    Report SPAM
On Bloomberg Radio today shortly after the interview, the commentators mentioned that Dimon's statement that the bank changes its valuation models (ie VaR) all the time is bogus. The commentators specifically noted Wells Fargo which never changes its valuation model nor does JPM change it as frequently as Dimon implied.
cor7997
Cor7997 - 5 years ago    Report SPAM
I think the most effective questions were from Sen. Jack Reed, in particular here:

: Now let me ask, it appears from looking at some published reports, that essentially these credit default swaps were first made to protect your loans outstanding, particularly in Europe, and that was in the 2007, 2008 time period, which is classic hedging. You have extended credits to corporations, if those credits go bad, you want to be able to be on the other side to insure yourself against that. But then in 2000, well 2011 or 2012 at some point, the bet was switched and now you started, rather than protecting your credit exposures, taking the other side of transaction and selling the credit protection, which seems to me to be a bet on the direction of the market unrelated to your actual sort of credit exposure in Europe, which looks a lot like proprietary trading designed to generate as much profit as you could generate, which seems to be inconsistent again with, if this is simply a risk operation and you're hedging a portfolio. How can you be on both sides of the transaction and claim that you're hedging?

[b]http://www.bloomberg.com/video/94594841-reed-how-can-you-be-on-both-sides-of-transaction.html

HERE I THNK IS THE MOMENT WHERE MR. DIMON CONFESS THAT THIS IS A BET AND NOT AN HEDGE!
[/b][/b][/b]

slkiel
Slkiel - 5 years ago    Report SPAM
I happened to think that when you're dealing with these derivatives, they're all bets. It's a bet that the hedge will work, which is not always true. This wasn't a one to one hedge anyway.

Personally, I don't like any of these transactions. Big banks like this are kind of like a necessary evil. I would like to see CDS's banned. Proponents contend they drive down the borrowing rate, which I agree with, but I don't think is a good thing.
Cornelius Chan
Cornelius Chan - 5 years ago    Report SPAM
If Congress would re-implement the Glass-Steagall act as necessitated by the run-amok banks, we would not have to waste our time watching the politicians and the banker play verbal ping pong regarding a disclosed loss of $2B.

When the govt. lets the banks turn into "financial holding company" and allows this entity to make gambling bets with asset-backed derivatives using customer deposits, then what happens is the taxpayers of the land foot the bill for damage control when things go south.

Steven Kiel, do you agree or not?

[u][/u]

slkiel
Slkiel - 5 years ago    Report SPAM
Well, I agree in theory, but unfortunately the devil is in the details.

Tangentially, I think when these i-banks were actual partnerships, with partner assets involved, the risk of blow-up was reduced. I don't know if a policy can change that, but there is an inherent conflict of interest when they are publicly traded companies. There is a valid reason why law firms, for example, cannot be publicly traded. I also think there is a valid reason why i-banks shouldn't be. You cannot owe a duty to shareholders, clients, and partners without one of them being in conflict. I'm hoping there will be more written about that from someone smarter than me.
AlbertaSunwapta
AlbertaSunwapta - 5 years ago    Report SPAM
The hedges may have been been based on sound reasoning regarding intrinsic values, and over time might not only hedge other exposure but even prove profitable. However, when the world knows what you are doing and that you are taking outsized bets near any realistic limits, they can alter short term market conditions to their own benefit.
John Emerson
John Emerson - 5 years ago    Report SPAM
I can not envision any senario where selling Credit Default Swaps is a hedge. Selling a CDS is consummate to selling insurance; a hedge implies buying insurance.

More likely, selling the CDS was an attempt to beef up short term trading profits by taking a side on the sovereign debt crisis. Further, JPM was the big whale in a small insolvent market who was attempting to bully out the weaker competition. If you break the competition in a game of chicken it does not matter if your thesis is correct or incorrect in the longer term. In the interim you can assume their positions as you force them out and balance out your other side of the trade.

That is not a hedge; rather it is an attempt to corner the market.

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