The
2 Billion Dollar Loss By JP Morgan Is Just A Preview
Of The Coming Collapse Of The Derivatives Market
http://theeconomiccollapseblog.com
http://albertpeia.com/collapseofderivativesmarket.htm
When news broke of a 2
billion dollar trading loss by JP Morgan, much of the financial world was
absolutely stunned. But the truth is that this is just the beginning.
This is just a very small preview of what is going to happen when we see the
collapse of the worldwide derivatives market. When most Americans think
of Wall Street, they think of a bunch of stuffy bankers trading stocks and
bonds. But over the past couple of decades it has evolved into much more
than that. Today, Wall Street is the biggest casino in the entire
world. When the "too big to fail" banks make good bets, they
can make a lot of money. When they make bad bets, they can lose a lot of
money, and that is exactly what just happened to JP Morgan. Their Chief
Investment Office made a series of trades which turned out horribly, and it
resulted in a loss of over 2 billion dollars over the past 40 days. But 2
billion dollars is small potatoes compared to the vast size of the global
derivatives market. It has been estimated that the the
notional value of all the derivatives in the world is somewhere between 600
trillion dollars and 1.5 quadrillion dollars. Nobody really knows the
real amount, but when this derivatives bubble finally bursts there is not going
to be nearly enough money on the entire planet to fix things.
Sadly, a lot of mainstream news
reports are not even using the word "derivatives" when they discuss
what just happened at JP Morgan. This morning I listened carefully as one
reporter described the 2 billion dollar loss as simply a "bad bet".
And perhaps that is easier for the
American people to understand. JP Morgan made a series of really bad bets
and during a conference call last night CEO Jamie Dimon
admitted that the strategy was "flawed, complex, poorly reviewed, poorly
executed and poorly monitored".
The funny thing is that JP Morgan is
considered to be much more "risk averse" than most other major Wall
Street financial institutions are.
So if this kind of stuff is happening
at JP Morgan, then what in the world is going on at some of
these other places?
That is a really good question.
For those interested in the technical
details of the 2 billion dollar loss, an article posted on CNBC
described exactly how this loss happened....
The
failed hedge likely involved a bet on the flattening of a credit derivative
curve, part of the CDX family of investment grade credit indices, said two
sources with knowledge of the industry, but not directly involved in the
matter. JPMorgan was then caught by sharp moves at the long end of the bet,
they said. The CDX index gives traders exposure to credit risk across a range
of assets, and gets its value from a basket of individual credit derivatives.
In essence, JP Morgan made a series
of bets which turned out very, very badly. This loss was so huge that it
even caused members of Congress to take note. The following is from
a statement that U.S. Senator Carl Levin issued a few hours after this news
first broke....
"The
enormous loss JPMorgan announced today is just the latest evidence that what
banks call 'hedges' are often risky bets that so-called 'too big to fail' banks
have no business making."
Unfortunately, the losses from this
trade may not be over yet. In fact, if things go very, very badly the
losses could end up being much larger as a recent Zero Hedge article detailed....
Simple:
because it knew with 100% certainty that if things turn out very, very badly,
that the taxpayer, via the Fed, would come to its rescue. Luckily, things
turned out only 80% bad. Although it is not over yet: if credit spreads soar,
assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20
billion loss when all is said and done. But hey: at least "net" is
not "gross" and we know, just know, that the SEC will get involved
and make sure something like this never happens again.
And yes, the SEC has announced an
"investigation" into this 2 billion dollar
loss. But we all know that the SEC is basically useless. In recent
years SEC employees have become known more for watching
pornography in their Washington D.C. offices than for regulating Wall
Street.
But what has become abundantly clear
is that Wall Street is completely incapable of policing itself. This
point was underscored in a recent commentary by Henry Blodget of Business Insider....
Wall
Street can't be trusted to manage—or even correctly assess—its own risks.
This
is in part because, time and again, Wall Street has demonstrated that it
doesn't even KNOW what risks it is taking.
In
short, Wall Street bankers are just a bunch of kids playing with dynamite.
There
are two reasons for this, neither of which boil down to "stupidity."
The
first reason is that the gambling instruments the banks now use are
mind-bogglingly complicated. Warren
Buffett once described derivatives as "weapons of mass
destruction." And those weapons have gotten a lot more complex in the past
few years.
The
second reason is that Wall Street's incentive structure is fundamentally
flawed: Bankers get all of the upside for winning bets,
and someone else—the government or shareholders—covers the downside.
The
second reason is particularly insidious. The worst thing that can happen to a
trader who blows a huge bet and demolishes his firm—literally the worst thing—is
that he will get fired. Then he will immediately go get a job at a hedge fund
and make more than he was making before he blew up the firm.
We never learned one of the basic
lessons that we should have learned from the financial crisis of 2008.
Wall Street bankers take huge risks
because the risk/reward ratio is all messed up.
If the bankers make huge bets and
they win, then they win big.
If the bankers make huge bets and
they lose, then the federal government uses taxpayer money to clean up the
mess.
Under those kind of conditions, why
not bet the farm?
Sadly, most Americans do not even
know what derivatives are.
Most Americans have no idea that we
are rapidly approaching a horrific derivatives crisis that is going to make 2008
look like a Sunday picnic.
According to the Comptroller of the
Currency, the "too big to fail" banks have exposure to derivatives that is absolutely mind blowing. Just
check out the following numbers
from an official
JPMorgan Chase - $70.1 Trillion
Citibank - $52.1 Trillion
Bank of
Goldman Sachs - $44.2 Trillion
So a 2 billion dollar loss for JP
Morgan is nothing compared to their total exposure of over 70 trillion dollars.
Overall, the 9 largest
It is hard for the average person on
the street to begin to comprehend how immense this derivatives bubble is.
So let's not make too much out of
this 2 billion dollar loss by JP Morgan.
This is just chicken feed.
This is just a preview of coming
attractions.
Soon enough the real problems with
derivatives will begin, and when that happens it will shake the entire global
financial system to the core.
