More here: An $8bn Loss Or Was JPMorgan ‘Unhedged, Long-And-Wrong’ Post-LTRO2? (ZeroHedge, May 22, 2012):
So, in summary, it appears that the CDS data confirms what we suspected.
- A large (~$120bn) tail-risk tranche credit hedge was placed.
- The hedging of that hedge became very onerous but surprisingly profitable as markets rallied day after day with no give-back.
- This led to a greedy trader lifting some of the original tranche (and the HY short side) and leaving himself much more naked long to the market into LTRO2 – which marked the top. Losses escalated through April (~$2.5bn or so).
- Dimon went public (with some of the details).
- Last week, the rest of the tranche was dumped (we suspect) at a large cost (perhaps ~$5.5bn) leaving, we suspect…
- A potential ~$8bn loss and a heavy IG9 long credit position hedged (with major basis risk – difference in dynamics between the legs of the trade and the hedge) by various other liquid positions including shorts in HYG, JNK, IG18, and HY18 (and we would suspect equity/financials too).