According to the Sydney Morning Herald it's the biggest
parlour game on Wall Street: estimating how large JPMorgan's trading loss will
be from a hedging strategy that went wrong.
The biggest US bank by assets has already disclosed $2
billion of paper losses, and chief executive Jamie Dimon said it could lose
another $1 billion or more. The losses
will grow, some traders say, because it appears JPMorgan has only sold a small
portion of its position, leaving it vulnerable to price swings in a thinly
traded market....
The source of JPMorgan's problems is an obscure group of
indexes that track the performance of corporate bonds. One of the indexes, the
Markit CDX NA IG Series 9 maturing in 2017, is essentially a portfolio of
credit default swaps - basically contracts that protect against default by a
borrower.
This particular index is tied to the credit quality of 121
North American investment-grade bond issuers, including such names as Kraft
Foods and Wal-Mart Stores. JPMorgan used that index, and others, to bet that
credit markets would strengthen. Because that position is widely known on Wall
Street, many traders are betting the opposite way in the hope of profiting as
the bank's losses increase. The index has been moving against JPMorgan in
recent days….
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