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JPMorgan Chase Chief Investment Office Has A Whale Problem

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So what is this crazy thing JPMorgan Chase has gone and done now, and how worried should we be about it?

Actually, it's not that crazy, but that doesn't mean we shouldn't still be worried about it.

JPMorgan is the Great White Whale of the global economy, massive and influential and potentially a little dangerous if things go horribly wrong.

And inside of JPMorgan there is an actual Whale, the London Whale, which is the nickname for a trader who has amassed such a humongous position in credit derivatives that he can move the market with a flick of his big flappy tail.

This situation has some of JPMorgan's banking rivals, hedge funds and large media organizations worried and/or jealous!

But wait, there's more: Bloomberg on Friday reported that the Whale is just one fish in a whole pod of whales, the JPMorgan chief investment office. The CIO, also known as the treasury desk, is supposed to be an unassuming, harmless operation that makes sure all of the bank's market risks are hedged. If the bank lends Acme Anvil Co. money, for example, the treasury desk hustles into the credit derivatives market and buys an insurance policy against Acme Anvil going bust. Nobody gets hurt.

And a lot of observers say risk management is all JPMorgan's treasury desk, this pod of whales, is doing.

But Bloomberg and its sources say the desk has actually morphed, Transformer-like, into a big risky hedge fund, also known as a proprietary trading desk, where the bank gambles its money on speculative bets, for fun and mostly profit:

The shifting role of the CIO group at JPMorgan, which reported record firmwide profit for 2011, underscores how blurry the line can be between "proprietary trading" and hedging, and it highlights the challenge U.S. regulators face in curbing speculative bets by federally backed lenders under the so-called Volcker rule.

The Volcker Rule, thoughtful readers will recall, is the part of the Dodd-Frank financial-reform law that prohibits banks from proprietary trading, or using their federally insured money to make big stupid bets, leaving us on the hook to bail them out when it all goes horribly wrong. We shouldn't be financing hedge funds inside of banks, in other words. The banks declare it is a very fine line, though, between stupid and clever prop trading and simple risk management.

JPMorgan flatly denies it's doing prop trading with its CIO desk. After its quarterly earnings report this morning -- the bank did better than expected -- CEO Jamie Dimon and CFO Doug Braunstein dismissed the worries.

"It's a complete tempest in a teapot," Dimon said. "Every bank has a major portfolio and in those portfolios you make investments to offset exposures. Obviously it is a big portfolio; we are a large company."

What's the truth? It's still hard to tell. There's no doubt the London Whale is turning a profit, as the Wall Street Journal reported earlier this week. Not that there is anything wrong with that, necessarily -- just a happy risk of making bets to offset other bets.

Matt Levine at DealBreaker helpfully pulls some numbers for both JPMorgan's investment bank and its CIO and compares them to see which is taking more risks and making more money. He finds that the investment bank is making a lot more money than the CIO.

But he also notes that the two entities are subject to different accounting rules, so we can't really compare them adequately. And by one measure, the CIO is taking bigger risks than the investment bank, Levine notes.

Anyway, it seems that size is what matters here. The fact that JPMorgan has these positions is maybe not that surprising or evil, and the fact that these bets are so massive is simply a function of the bulk of JPMorgan, the greatest whale of all. The real question is whether that is a healthy thing for the world.