/ May 16, 2012 at 12:32 PM

Even as a trader for JPMorgan in London was selling piles of insurance on corporate debt, figuring that the economy was on the upswing, a mutual fund elsewhere at the bank was taking the other side of the bet.

But perhaps one of the most surprising takers of the JPMorgan trade was a mutual fund run out of a completely different part of the bank. The bank’s Strategic Income Opportunities Fund, which holds about $13 billion in client money, owns about $380 million worth of insurance identical to the kind the “London whale” was selling, according to regulatory filings and people with knowledge of the trade. It is unclear how much the fund made.

This is not surprising. Some people want to sell CDS, some people want to buy it. Thats how theres a market. And when youre as big and interconnected as JPMorgan, its not surprising that the market often crosses between bits of yourself. That is, its sort of silly to think of JPMorgan as a market participant; it is rather a nexus of many many market participants. Some of those participants are JPMorgan, in that theyre interested in the performance of JPMorgan as an entity; others of them are clients in the sense that they are buying securities from JPMorgan or having their assets managed by JPMorgan in some separate or mutual-fundy way; but to think of them all as JPMorgan is silly.

But the conclusions from this unremarkable fact are sort of interesting:

In that way, it is different from the example of Goldman Sachs in 2007, when it sold subprime mortgage securities while betting against them. In the case of JPMorgan, it was the reverse: the bank took risk with its own money to sell the insurance contracts that have cost the company money. The asset management division, meanwhile, invested on behalf of its clients when it bought the contracts.

In this case, it may turn out to be a silver lining. If nothing else, it indicates that the asset management division, run by Mary Callahan Erdoes, acted independently from the bank, as is required.

“You’ve got so many different businesses, they are not coordinated and they are not telling each other things and that turns out in this case to have been a virtue,” said Robert Litan, vice president for research and policy at the Ewing Marion Kauffman Foundation. “But that also feeds into another concern, and that is that JPMorgan is not only too big to fail but too big to manage.”

“There’s really effectively only one lesson other than the interesting irony,” said Douglas J. Elliott, a researcher at the Brookings Institution. “The lesson is that the asset management firms really do act like different bodies. They don’t share info. They don’t always have the view of the rest of the firm. That’s how we want it to be, and that’s how it was in this case.”

So, one: yes. Im sure thats true that Bruno Iksil and the managers of this mutual fund didnt sit down and talk out the risks and rewards of this trade and ultimately decide that one of them should go long and the other should go short.

Two, though: what if this had gone the other way? This trade is in some crude sense unnatural: you would naïvely expect JPMorgans CIO to be buying corporate credit protection and its Strategic Whatsit Whosit to be selling.** Imagine it had gone that way: the CIO had bought zillions of dollars of index credit protection, the mutual fund had sold a chunk of it, and then well in this scenario imagine that CDX deteriorates, the CIO doesnt get picked off and makes $2 billion, and the mutual fund loses some money. Would the conclusion there be the asset management firms really do act like different bodies, bodies housing brains that are sometimes smarter and sometimes dumber than the CIO, or would it be ZOMG JPMorgan sold corporate credit to customers while betting against it?

I dont know! The whole thing where they actually probably dont share info between asset management and CIO would probably be helpful. And JPMorgan making $2bn off a trade is probably less newsworthy than it losing $2bn. Still, I suspect the main reason that this trade is different from the example of Goldman Sachs in 2007, when it sold subprime mortgage securities while betting against them is that here JPMorgan-as-entity lost money and JPMorgan clients made money (maybe!).*** And that the one worse PR move for a bank than losing money for itself is making money trading against its customers.

** That mutual fund is a credit fund; its natural state of being is to be long corporate credit though I suppose its purchases of CDX protection were a market hedge to being long specific names. (Or perhaps it is actually not that into corporate credit. whatever.) Similarly, the CIO is at least in part in the business of hedging JPMorgans broader credit exposures as a bank. so youd think it would be interested in buying protection (as it was in addition to selling ).

*** I mean, there are also other, more sensible differences, like that GSs Abacus trades were marketed by the people who stood to gain on them rather than through independent brokers (bad fact for GS), or the fact that JPMs Structured Whatsit investment decision was made by JPM rather than its clients (bad fact for JPM if it had lost money).