Here’s the chart you’ve all been waiting for, courtesy of Reuters’s very own Scotty Barber: the spread on the CDX NA IG 9 index — the synthetic index on which JPMorgan’s Bruno Iskil was selling enormous amounts of protection — minus the spread on the index’s constituent bonds.
Three things jump out here. Firstly, the basis is negative, not positive. That means that the obvious trade was to buy the underlying bonds and hedge by buying protection on the index. That obvious trade, if held to maturity, should always make money. Iksil was funding that trade, by selling protection on the index.
Secondly, the chart is going up and to the right. Since Iksil was selling protection, that means the market was moving against him. Or, to put it another way, the obvious trade makes money when it expires at zero, and as the chart moves towards zero, Iksil loses money on a mark-to-market basis.
Finally, the move doesn’t seem to be all that huge — only about 30bp in this quarter. Which doesn’t seem remotely enough to cause a $2 billion loss. Still, Iksil managed it somehow.