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London Whale Trades Led to Big Profits for BlueMountain


Addressing its so-called "London Whale" trades in detail for the first time, the New York hedge fund BlueMountain Capital Management called JPMorgan’s in a corporate derivatives index “dumb” but also unimportant in the context of an “otherwise robust bank.”

JP Morgan Chase headquarters
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Writing in BlueMountain’s second-quarter letter, which was disseminated to investors in recent days, chief executive Andrew Feldstein described how his firm made money by trading the illiquid CDX IG-9, an index tracking corporate debt through which JPMorgan eventually lost nearly $6 billion — and counting.

Echoing comments he made to CNBC at the “Delivering Alpha” investor conference July 18, Feldstein wrote that BlueMountain had profited from the IG-9 trades in two ways: through an index arbitrage that involved buying protection against default on the corporations represented in the index as a whole, while at the same time selling protection on the 121 different companies comprising it; and by purchasing corporate risk from JPMorgan in May and June.

BlueMountain has “fully exited” over 90 percent of the index and single name hedges, Feldstein wrote, and now has “less than” $4 billion of a resultant position.

Breaking News: BlueMountain on JPMorgan 'Whale' Trade

About a quarter of BlueMountain’s year-to-date returns of 10.17 percent came from the London Whale trades, the letter states, without pinpointing the amount in dollars. In May and June alone, adds the letter, BlueMountain traded more than $50 billion worth of CDX IG-9 exposure with JPMorgan. BlueMountain manages a total of about $9.5 billion.

In addition to sharing BlueMountain’s second-quarter results, Feldstein, a former JPMorgan trader who is still friendly with a number of former colleagues there, used the letter to weigh in on the national debate over financial regulation, saying that the current push for harder-hitting and more complex governing laws was wrongheaded.

“As in the classic children’s tale, there is a danger to crying ‘wolf’ when no mortal risk exists. We become so inured to the parade of over-hyped misdeeds that we fail to react appropriately when the real wolf appears,” he wrote.

More specifically, Feldstein added, the media and lawmakers should be focused on the Libor scandal — which, he noted, is estimated to have impacted between $500 trillion to $800 trillion worth of contracts and obligations — rather than the less-significant London Whale debacle. (Get an explanation of Libor here.)

“Libor is orders of magnitude more significant than some dumb trades that halved the quarterly profits of an otherwise robust bank,” he wrote. “Libor underlies hundreds of trillions of dollars of financial agreements across the globe.”

-By CNBC's Kate Kelly