JP Morgan Loses $2 billion via Hedging
I usually don't spend a lot of time talking about the industry that is the source of my livelihood, but this story is just too good to pass up. Seems that some brilliant trader decided to hedge his positions with exceptionally bad positions. So bad, in fact, that these hedges - not the original positions, but the hedges, have cost the bank $2 billion, and it's estimated that it might cost them another billion before it's all said and done.
What's even more amazing is that JP Morgan has the cash to take the loss and not post a loss for the quarter. Amazing. First, that they believed the hedges were, in fact, hedges, and that they had more than $2 billion to waste.
If they were, indeed hedges, then they were designed to cancel the loss of the original positions. This means that if the hedges lost value, then it should have been the case that the original positions gained value. So they must have picked the most horrific hedging instruments and then held far too much of them to loose that kind of money.
Really. That's almost impressive.