When news like last night’s London Whale thing breaks, it’s only natural that everyone goes running around screaming and offering opinions. That’s cool, it’s human nature. I know nothing about hurricanes but during the one last summer I was glued to the doppler app on my iPad like f*ckin’ Mission Control, with all kinds of hypotheses about which way the storm would turn and whether it was losing strength, etc.
Anyway, I got to hang with my friend Kid Dynamite this week in Boston and our time together affirmed what I had already suspected – that he knows his stuff and has been there for real. Kid was a program trader at a big firm on The Street during the credit boom and has forgotten more about i-bank trading activities than most people will ever know.
His take on JPMorgan’s announcement is not to be missed:
I know what’s on your mind this evening – JPM’s announcement of large trading losses related to the London Whale in their CIO division who was supposed to be hedging risks in other parts of the firm. Let’s get to that in a minute – first, a story.
The first part of my Wall Street career was on the sell side (read: client facing) of a major bank. We executed orders for clients and managed a large risk portfolio as a result of principal trades where we committed capital. Our expertise was in ETFs, index arbitrage, program trading, index related trades, etc. Anyway, the second part of my career was at an internal hedge fund on the buy side of the same bank. Our group was essentially managing the bank’s capital – we were now a customer to other Wall Street firms.
Aside from my prop group, which managed a few billion dollars, there were a few handfuls of other groups, all under one umbrella. The guy who ran that umbrella of trading pods – The Boss – would sometime execute his own trades to hedge the accumulated risks of the groups under his domain. Since my group had expertise in executions of likely hedging instruments, my boss had convinced The Boss that he should call us if he ever needed help executing a hedge.