Fun with JP Morgan

There are plenty of stories about JP Morgan bank losing £2 billion on some stupid bet, but the interesing question is, who took the other side? That money doesn't just disappear into thin air.

According to CNBC:

... as a trader for JPMorgan in London was selling piles of insurance on corporate debt, figuring that the economy was on the upswing, a mutual fund elsewhere at the bank was taking the other side of the bet.

The trade contributed to more than $2 billion in losses for JPMorgan, which disclosed the loss last week. The hedge funds, including Blue Mountain Capital and Blue Crest, have profited handsomely thus far as the markets move against JPMorgan.

But perhaps one of the most surprising takers of the JPMorgan trade was a mutual fund run out of a completely different part of the bank. The bank’s Strategic Income Opportunities Fund, which holds about $13 billion in client money, owns about $380 million worth of insurance identical to the kind the “London whale” was selling, according to regulatory filings and people with knowledge of the trade. It is unclear how much the fund made.

The good news is, whoever takes the winning side of the bet gets a big bonus and whoever takes the losing side gets a smaller bonus, or none at all. So it's in the interest of bank employees and hedge fund managers, taken collectively, to make as many stupendously large bets with other people's money as possible on anything that looks even vaguely plausible; whatever happens, their overall wealth increases and everybody else's overall wealth goes down. But I am sure that all these traders and experts are far too honourable (or too stupid) to ever cook up such a scheme.