Help me better understand risk management

May 11, 2012 8:20 PM

Can someone explain the following quote by a senior Wall Street executive, “JPMorgan violated the cardinal rule of risk: Don’t become the market.”

The quote is from this NYTimes article on JP Morgan's $2 billion paper loss.

Thanks! :)

posted by jchaw to Work & Money (2 answers total)

FT Alphaville has an excellent technical discussion of the trade in question. The quick answer is that JP Morgan had such a large position in a single instrument that it distorted the price, and other investors picked up on that and tried to take advantage of the distortion, thus making it difficult for JP Morgan to maintain the trade as a hedge and forcing them to back out at a loss.
posted by kiltedtaco at 9:10 PM on May 11, 2012 [1 favorite]

Another way of looking at it: It is great to be a monopoly. Right up until nobody wants your stuff any more.

"Becoming the market" or "cornering a market" means that you control a significant-enough percentage of the inventory in a market that you can't make a move without affecting the price.

And I'm not sure this was a paper loss, I think it was a real loss.
posted by gjc at 6:33 AM on May 12, 2012 [1 favorite]