Good As Gold?

Said a fellow who looked into gold
For the hedging effects it may hold:
"After testing with rigor,
I really can't figgur
The typical tales that are told."

"It's hard to explain how this thing got
The following no other bling got,
But immunization
From rampant inflation
Is more than you get from an ingot."

No Pain - Or Gain

While bankers are prone to complain
That hedging is hard to explain,
It's fairly alleged
That you aren't really hedged
If you're also expecting a gain.

One of the many talking points employed by JPMorgan Chase CEO Jamie Dimon in his closely watched Senate testimony this week was that "this particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge; what it morphed into, I will not try to defend." The Chief Investment Office's loss - $2 billion and rising - on its London Whale position was simply well-intentioned risk management gone bad. In this, Mr. Dimon deliberately muddied the waters and his senatorial inquisitors failed to impose any clarity on the discussion. Anytime you say "I expect this position to make a profit if X happens," you are making a bet, not a hedge. The fact that market turmoil is expected to trigger the profits does not remove it from the realm of speculation. The only one who is truly hedged is the one who can say: "My results are locked in regardless of what the market does."

Dimon's Congressional Testimony

A high-ranking finance professional
Who was called to a hearing Congressional
To give his account
Of a massive amount
That was lost, made a searing confessional:

"My Office of Risk Diminution
Found a newfangled hedging solution,
Which no one construed
Nor checked, nor reviewed,
Nor subjected to sound execution."

"But in spite of my solemn admission
(Which I make with humblest contrition)
That we bungled our bets -
We are hiring vets
And expanding our lending position."

"So before you propose regulation
To limit our trade fluctuation,
No federal commission
Could outmatch our mission
To aid the American nation."

J.P. Morgan Chase CEO Jamie Dimon has been called to testify before the U.S. Senate Committee on Banking, Housing and Urban Affairs, to answer for the infamous and still-growing loss from derivative positions in the bank's Chief Investment Office. For those of you too busy to review the full text of the CEO's prepared testimony, I humbly offer the foregoing summary in verse. The rest of you may draw some insightfully ironic enjoyment from Mr. Dimon's deft attempt to deflect criticism of the bank's errors and omissions, and to convince the Senators that the bank is its own best overseer.

A Whale of a Tale

Said the boss of a trading facility,
Whose job was to crimp volatility:
"While I'm away jettin',
Be sure you don't threaten
The global financial stability."

Though much has been written about JP Morgan's "London Whale" and the $2-billion-and-growing loss that arose from his credit index trades, there has not been much focus on the interpersonal management dynamics of the case, until yesterday. The New York Times' Jessica Silver-Greenberg and Nelson Schwartz looked into the story and concluded that "Discord at J.P. Morgan Unit is Faulted at Loss." In a modern, highly-leveraged twist on "when the cat's away, the mice will play," it appears that the egos and ambitions of Bruno Iksil (the Whale) and his boss Achilles Macris could not be contained once the bank's chief investment officer, Ina Drew, was out sick for an extended period. Without Ms. Drew's "coolheaded, steely resolve", the internecine tensions between the CIO's New York and London offices devolved into daily screaming matches with no clear leader to to set limits and keep discipline.

Betting One's Hedges

There's a false sense of immunization
In many a hedge operation;
Positions one places
On ill-conceived bases
May end up as wild speculation.

JP Morgan Chase CEO Jamie Dimon stunned investors on Thursday with the announcement of a $2 billion trading loss in the bank's risk management unit. Some reacted with schadenfreude, in view of Mr. Dimon's previously dismissive attitude toward reports of the firm's massive credit default swap positions. The Chief Investment Office's head trader, Bruno Michel Iksil, had been dubbed "the London Whale" for his huge, market-distorting CDS bets on the so-called CDX IG 9 index of the credit risk of 125 companies. Mr. Iksil sold protection on the index during the first quarter, essentially writing an insurance policy that the indexed companies' credit would not deteriorate.

Based on his limited knowledge of this case, Dr. Goose is at a loss to explain how the selling of credit protection constitutes a risk management function for a bank (one would sooner expect them to be buying credit protection). Nevertheless, even the most well-intentioned hedge position can go awry if the underlying assumptions do not hold, and many a "hedge" entered into on the basis of a particular market outcome is just speculation by another name.

They'll Live Forever, Won't They?

Barney Frank has explained with assurance
How default swaps defaulted in torrents.
Says Frank: "AIG's
View of poor mortgagees
Was like vampires buying insurance."

Where's My Hedge?

Said the trader: "We've no business trying
To bet on the debt underlying;
When we want to unwind,  
We quite often find  
That the market is no longer buying."

He Hedged, and Regretted It

Said an old soybean farmer named João,
Admiring the fruits of his plow,
"My only concern is,
The money I earn is
All tied up in margin calls now."