Felix Salmon, the finance blogger at Reuters, has described JPMorgan’s Chief Investment Office, the division of the bank responsible for the $2 billion (and growing) loss on an unwieldy credit derivative trade, as “at heart a hedge fund,” because the purpose of the office is to invest the “excess” money that JPMorgan takes in as deposits (many of which federally guaranteed) and, instead of loaning it out, they invest it in order to hedge the rest of the bank’s loan and investment portfolio.

This is, at least conceptually, similiar to what many corporate treasuries do — putting money to work in the financial markets, especially with derivatives, in order to hedge against risk that a company is exposed to by its very nature.

But it turns out that the CIO not only executed a disastrous trade in an effort to hedge JPMorgan’s exposure to corporate debt, but is a major investor in all sorts of exotic securities and credit dervatives that seem to be part of an effort to turn the CIO into a profit center rather than a conservative hedging operation. The Financial Times has an essential look at their activity:

The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralised loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times.

But the CIO has also dominated market activity and built up huge positions in other, equally esoteric markets, according to leading traders.

“I can’t see how they could unwind these positions because no one can replace them in terms of size. It’s a bit of the same problem they face with the derivatives trade,” said a credit trader at a rival bank. “They pretty much are the market.”

The unit made a deliberate move out of safer assets such as US Treasuries in 2009 in an effort to increase returns and diversify investments. The CIO’s “non-vanilla” portfolio is now over $150bn in size.

Salmon speculates that the CIO’s high level of risk might be due to to the fact that its cost of funds is cheaper than other sections of JPMorgan. After all, they come from deposits, which are not just government insured, but the cheapest source of funding for banks. And while the CIO’s activities may not violate the final text of the still-to-be-implemented Volcker rule, we are still seeing the bank which gained the most from the financial crisis (including deposits), because of its industry-leading risk management, parking its deposits in trades that can lose at least $2 billion because they are dominating and distorting the market of a particular type of credit derivative.

The FT account does end on a heartening note: “The bank is planning to reduce its exposure to more complex products in the CIO and is likely to invest more of its $360bn in “excess deposits” in safer securities such as US Treasuries.” The least a too-big-to-fail institution can do is fund our national debt.

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