JPMorgan Chase & Co. trader Bruno Iksil’s outsized bets in credit derivatives are drawing attention to a little-known division that invests the company’s reserves and fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money.
Iksil’s influence in the market has spurred some counterparts to dub him Voldemort, after the Harry Potter villain. He works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money.
Chief Executive Officer Jamie Dimon, 56, sent a 38-page letter to shareholders last week, saying he agrees with the Volcker rule’s intent to eliminate “pure” proprietary trading and ensure market-making won’t jeopardize banks. Still, as with derivatives laws, the rule must be written so that it doesn’t put U.S. banks at an international disadvantage, he said.
Iksil’s bet won out, and the hedge funds faced losses of 25 percent, when American Airlines parent AMR Corp. filed for bankruptcy less than a month before the insurance-like swaps matured, the market participants said. The trades were made in so-called tranches of the index, which take concentrated risks on the member companies.
The trade on the index, known as the Markit CDX North America Investment Grade Series 9, probably isn’t a one-way bet, the people said. Iksil may be offsetting the trade by buying protection on the same index with contracts that expire about eight months from now, the people said. That strategy would pay JPMorgan the difference between the long-dated contracts and the short-dated ones, about 47 basis points as of April 6, and the trade would gain when the gap narrows. The hedge would end in December unless another trade is made to replace it.
The extra liquidity meant a bigger pool of money for the chief investment office to manage -- and more revenue. The bank’s annual report for 2009 showed $6.63 billion of revenue for the corporate segment, up from $4.42 billion in 2007. It cited “the chief investment office’s significant purchases of mortgage-backed securities guaranteed by U.S. government agencies, corporate debt securities, U.S. Treasury and government agency securities and other asset-backed securities.”
A search through profiles on the LinkedIn professional-networking website shows current and former executives in the chief investment office citing their proprietary-trading experience and connections.