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What Could Have Happened at JPMorgan?

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It's tough to make sense of the synthetic credit derivative trades that caused a $800 million loss for JPMorgan.

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Well, for once it's not Spain or Greece in the news. It's JPMorgan (JPM) and the synthetic CDO, or collateralized debt obligations.

This is the end of synthetic CDOs and may well be the end of credit default swap, or CDS, as an over the counter product, but we have time to look at that later. There is a lot of information and misinformation out there.

For now, the key is what is this going to do for the markets.

As best as I can tell, they were generally short High Yield credit default swaps, or HYs, risk. They were mostly short tranches, mostly in off the run, and had some curve trades on.

Against that, they were generally long Investment Grade credit default swaps, or IGs, mostly tranches, mostly IG9, or CDX.NA.IG.9, and also had some curve trades on.

The positions, if we ever find out exactly what they were, are complex. At some level, this disclosure has something to do with mark to model.


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So HY17, or CDX.NA.HY.17, is lower on the quarter. If they were short, they should have made some money. Strange and in any case, a relatively small move.


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IG9 10-year is wider. It was out 15 bps since the end of the quarter, from 112 to 127.

To lose $2 billion on a 15 bp move would be about $275 billion of notional equivalent.


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Scary, but something very strange has gone on.

Editor's Note: For more from Peter Tchir, check out TF Market Advisors.

Twitter: @TFMkts
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No positions in stocks mentioned.

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