Turns out the unit at JPMorgan that's responsible for the loss has been the biggest buyer of European mortgage-backed bonds and other complex debt securities in all markets for three years.
Now JPMorgan has built up positions totaling $100 billion in the same risky financial products that triggered the financial crisis in 2008.
But anyone who followed Money Morning's Shah Gilani as he covered the topic knew this was a likely hidden truth.
You see, Gilani told us last Sunday, just days after news of the losses broke, that there was more to these trades than one hedge-gone-wrong.
"The idiots at the bank wanted to hedge against European credit exposure that they had," Gilani wrote last to his Wall Street Insights and Indictments readers. "They are idiots because the money that's shepherded by the Chief Investment Office (some $379 billion, yeah, that number is right) is money that the bank has and hasn't lent out, or technically is "available" to play with. And instead of parking it in U.S. government bonds (Citi has $293 billion of the same float and has 87% of it parked in "governments"), they parked a lot of it in Europe's crappy credit markets.""So, they get nervous and tell the CIO to hedge their European credit exposure," Gilani continued. "That's not stupid. What is stupid is that they put on a giant trade in an illiquid part of the markets (derivative spreads... it will come out, I'm sure.)"
Yet again, Gilani was right on the money.
How did he nail this one? That's because his years behind the "velvet rope," toiling in trading pits, means he knows how these businesses operate - and what they hide.
And he can warn investors ahead of the news, and ahead of The Street's reaction.
JPMorgan Losses ExplainedThe FT reported that the positions started as a deliberate move in 2009 made by the chief investment office, the unit at the center of this scandal.
The goal was to snag a bigger return on a riskier bet, as well as diversify the portfolio. The money was moved out of safer assets, like U.S. Treasuries, and into asset-backed securities, collateralized loan obligations, and other risky securities.
The positions are so large that getting rid of them will be painfully difficult - or, impossible.
"I can't see how they could unwind these positions because no one can replace them in terms of size. It's a bit of the same problem they face with the derivatives trade," a credit trader at a rival bank told The FT. "They pretty much are the market."
As Gilani detailed last Sunday, the initial $2.3 billion dollar losses were just the hint that JPMorgan was in trouble , and "stupid" moves were to blame.
"The London Whale, Bruno Iksil, the head trader on this beauty of a trade, got into a position that he couldn't get out of, and the boys on the other end played him like a patsy," said Gilani.
Now no one wants to touch the investments, meaning JPMorgan is stuck.
"I'm guessing that it's going to cost them another billion or two to unwind this gem, maybe three," said Gilani. "I am so laughing and so jealous that I'm not on the other side of their stupid trade. This whole thing, the whole "chance" thing doesn't have anything to do with chance. Things happen for a reason."
JPMorgan Loss Prompts Regulation QuestionsThe Wall Street Journal broke more news today (Friday) surrounding the embarrassing loss, including details of an April 30 meeting where Jamie Dimon first learned of the situation.
Dimon was given summaries and analysis of the losses, but there were no details about the trades themselves.
According to meeting attendees, Dimon barked, "I want to see the positions!" adding, "Now! I want to see everything!"
Now those losses could total closer to $5 billion, The Journal reported.
This disaster has prompted many questions from people in Washington and on Wall Street about how much oversight a CEO really has of a large financial institution. Many wonder if the new Wall Street regulations will do enough or anything to curb these kinds of actions and whether or not more rules are needed to prevent such risky behavior.
JP Morgan's former Chief Investment Officer, Ina Drew, was head of the group responsible for the trade and she already resigned.
The pressure is now on Jamie Dimon.
It was revealed in The Journal article that Dimon personally approved the concept behind the disastrous trades.
However he didn't monitor how they were executed, triggering some resentment among other business chiefs who say the activities of their units are routinely and vigorously scrutinized.
Some of the bank's directors recently suggested to Dimon that he back off from publicly criticizing politicians seeking to more vigorously regulate the banking industry.
At JPMorgan's annual shareholder meeting it appeared that Dimon was not ready to fully comply with that advice.
He continued to criticize the cost and complexity of added regulation, but said he supports most of the proposed regulatory rules, including some of the so-called Volcker Rule, which would bar banks from making bets with their own money.
[Editor's Note: Capital Waves Strategist Shah Gilani is a rare commodity. As a retired hedge fund manager, Shah knows all of the ins and outs of the markets and can always spot the hottest opportunities. And since he's no longer directly a part of the Wall Street power structure, he is willing to show you how to capitalize on them. This report is just one way Shah helps investors level the playing field. His Capital Waves Forecast is another. To learn more about Shah Gilani click here. You'll be glad you decided to follow along.]
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