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New details continue to emerge on the matter of JP Morgan’s $2 billion (and counting) trading loss in its chief investment office (CIO).Bloomberg’s Matthew Leising, Mary Childs and Shannon Harrington are now reporting that some of the securities in JP Morgan’s CIO office may be being priced incorrectly:
The JPMorgan Chase & Co. unit responsible for at least $2 billion in losses on credit derivatives was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter.
The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorised to discuss the matter.
Details in Bloomberg’s article were sparse.
Our suspicion was that the discrepancy may have had something to do with the timing of marks as it relates to how securities are classified in a trading book.
We reached out to top banking analyst Brad Hintz of Sanford Bernstein about this.
“You are thinking that there is a right answer,” Hintz told us in an email. “In illiquid markets like OTC derivatives there are vast grey areas. So different pricing of the same security held in different places at the bank is simply one problem that CFOs fight to ensure clean decision-making by the businesses.”
Hintz’s really gets this business. Previous positions he has held include CFO at Lehman Brothers and Treasurer at Morgan Stanley.
He shared some of his experience with us.
“When I was Treasurer at Morgan Stanley, we saw Citibank lending money in NYC at a lower price than the MS treasury would get from investing money at an offshore Citi branch. That is an example of bad internal pricing. Two different rates for money led to a loss for the bank. “
All of this goes to show how complex the financial system has gotten.