trading losses at i-banks — vastly different natures

A $1billion trading loss can mean a lot or mean nothing to an investment bank. Let’s assume a hypothetical full-service investment bank named SS.

$1b trading loss in a SS hedge fund (a subsidiary buy-side run by SS) — assuming SS house money is not invested in the fund(which is rare), then the $1b hit the fund’s clients only. If they start to withdraw, SS will lose management fee income at the end of the quarter. NOT $1b loss in SS balance sheet!

$1b trading loss in a SS prop trading desk — Simple and clear. $1b House money lost.

$1b trading loss in a structured OTC desk — like prop

$1b trading loss in a bond desk which is always a dealership — like prop. “Dealer” is more accurate than “market-maker” or “agency trader”. See http://bigblog.tanbin.com/2010/11/agencyprop-tradersdealer.html

$1b trading loss in exchange agency trading — In this case, SS is THE counter-party to clients. SS takes positions. SS must carefully hedge its exposure to IR, vol, FX, credit risk, sector concentration etc. The $1b loss is bank’s loss, not client’s loss.

?? $1b trading loss in a pass-through brokerage unit in SS — An article on P40 of [[Bloomberg Markets Dec 2008]] confirmed that such a business does exist in an investment bank, but I doubt the brokers would know client’s PnL. This unit takes no position no risk, so should not suffer any loss. See http://bigblog.tanbin.com/2009/09/adp1-acid-test-for-brokerdealerpropflow.html

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