As One JPMorgan Trader Sold Risky Contracts, Another One Bought Them - US Business News - CNBC

As One JPMorgan Trader Sold Risky Contracts, Another One Bought Them - US Business News - CNBC: "While JPMorgan has been reluctant to share the details of the transactions, it is believed that the London trader, Bruno Iksil, sold default protection on a specific index: the CDX IG 9. That index tracks the default risk of 125 major North American companies, including Aetna, Walt Disney and Lockheed Martin. If the default risk increases, JPMorgan effectively loses money. By January and February of this year, brokers were relentlessly calling hedge funds and trying to sell the contracts to them, according to investors. Given the size of the position in the relatively quiet market, the seller was quickly revealed as JPMorgan. Hedge funds and others began to chatter about the merits of the trade.

The rationale for the hedge funds was simple: with JPMorgan selling so much of this insurance, the price was artificially cheap. In buying it, the funds were betting that the cost would increase when the bank eventually stopped selling. Such a move would notch them a tidy profit while causing steep losses on paper for JPMorgan."

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