Money Talks–even if it fails a lie detector
J.P. Morgan Chief, Tarnished by Trading Loss, Remains Steadfast Before Senate Banking Panel
Jamie Dimon explained the nature of hedging. “Think of the market as a roulette wheel. You want to be place a $5 bet on a number, say 23. You have a 1 in 37 chance of winning a 35 to 1 return. Now we, as the roulette wheel operator, will cover your bet; but we need to hedge it as well. After all, your number might come up and we would lose $ 175. So, our strategy is to place $175 on each of 34 other numbers on the roulette wheel. If any of numbers come up, we have successfully hedged ourselves from the future possibility of your number coming up. An investment of $5,950 could make us $5 and save us $175.
Of course, if your number or a zero comes up, then we will have lost the $5,950 and still have to pay you $175. That is why we have also made the same hedging bet on 35 other roulette tables. Fifteen will be in Europe and Asia for any foreign exchange fluctuations.
So you can appreciate the sophistication of our strategy.”
Senator: You lost three billion dollars hedging a $5 bet?
Dimon: And you only have yourself to blame. If you only allowed us to deregulate, we could have used a fixed roulette wheel.