When
The Derivatives Market Crashes (And It Will) U.S.
Taxpayers Will Be On The Hook
http://theeconomiccollapseblog.com
http://albertpeia.com/derivativesmarketcrashtaxpayerbailout.htm
‘Warren Buffett once said that derivatives are
"financial weapons of mass destruction", and that statement is more true today than it ever has been before.
Recently, JP Morgan made national headlines when it announced that it was going
to take a 2 billion dollar loss from derivatives trades
gone bad. Well, it turns out that JP Morgan did
not tell us the whole truth. As you will see later in this article, most
analysts are estimating that the losses will eventually be far larger than 2
billion dollars. But no matter how bad things get for JP Morgan, it will
not be allowed to fail. JP Morgan is the largest bank in the United
States, so it is essentially the "granddaddy" of the too big to fail banks. If JP
Morgan gets to the point where it is about to collapse, the
Derivatives
almost caused the complete collapse of insurance giant AIG back in 2008.
But instead of learning our lessons, the derivatives bubble has gotten even
larger since that time.
A Bloomberg article that was
published last year contained a great quote from Mark Mobius
about derivatives....
Mark
Mobius, executive chairman of Templeton Asset
Management’s emerging markets group, said another financial crisis is
inevitable because the causes of the previous one haven’t been resolved.
“There
is definitely going to be another financial crisis around the corner because we
haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in
Tokyo today in response to a question about price swings. “Are the derivatives
regulated? No. Are you still getting growth in derivatives? Yes.”
Never
in the history of the world have we ever seen anything like this derivatives
bubble.
But
instead of getting it under control, we just allowed it to get bigger and
bigger and bigger.
Now
JP Morgan is in quite a bit of trouble. A recent Daily Finance article
summarized how JP Morgan got into this mess....
Bruno
Iksil, a trader working in the bank's London office,
placed a massive bet in the derivatives market. Derivatives "derive"
their value from the value of an underlying asset, like stocks, bonds,
currencies, or a market index. The specific type of derivative used in Iksil's bet was a credit default swap index, known as
"CDX.NA.IG.9."
CDX.NA.IG.9
tracks a basket of corporate bonds. Iksil's positions
on the index were so big (one report put it at $100 billion) that they were
moving the market and interfering with other traders' positions. These annoyed
traders -- hedge-fund managers -- dubbed Iksil
"the
So if
the real number isn't 2 billion dollars, how much will JP Morgan eventually
lose?
Morgan
Stanley says that the losses could eventually reach 5 billion dollars.
The
Independent is reporting that the losses could eventually reach 7 billion dollars.
One
author featured on Zero Hedge suggested that the
losses could ultimately reach 20 billion dollars....
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.
The
truth is that nobody really knows. Everybody agrees that the losses will
likely far exceed 2 billion dollars, but the real extent of the crisis will not
be known until the trades play out.
According
to the Huffington Post, JP Morgan
recently sold 25 billion dollars of profitable securities to raise some
cash. The profit on the sale of those securities will be somewhere in the
neighborhood of a billion dollars.
A
billion dollars will help, but it will not be nearly enough.
Many
are interpreting this move as a sign of panic by JP Morgan.
Meanwhile,
JP Morgan CEO Jamie Dimon continues to do quite
well. In fact, his 23 million dollar pay
package was recently approved by shareholders at an annual meeting.
Wouldn't
you like to do your job badly and still make 23 million dollars?
Right
now, JP Morgan is essentially in a "staring contest" with those on
the other side of the derivatives trades that went bad. This
"staring contest" was described in a recent CNN article....
It's
clear from public data filed with The Depository Trust & Clearing
Corporation that JPMorgan Chase hasn't sold any of its positions yet. The DTCC tracks trading activity and
sizes of positions on the IG9 and other indexes, and there haven't been any big
moves since last week.
"Whatever
the size was, it's clearly not something that you can call one or two dealers
and sell," said Garth Friesen, a co-chief investment officer at AVM, a derivatives
hedge fund that's not involved in these trades.
As
soon as it becomes clear that JPMorgan Chase is unwinding its position, it will
be obvious to players on every major trading desk. Hedge funds will immediately
start piling into that index and buying protection, driving up the bank's
losses.
Until
then, it won't cost the hedge funds much to sit and wait.
JP
Morgan is desperately hoping that the markets move in their favor.
If
the markets move against JP Morgan in a big way it could potentially be
absolutely catastrophic for the biggest bank in
An
excerpt from an email that Steve Quayle recently
received from an anonymous international banking source contained some
chilling analysis of the situation....
The
derivative market that JPM plays in is the CDX.NA.IG.9, when factions within
their London office (London Whale) made overly leveraged swaps, hedge funds smelled
blood and so did a few banks. You see any moves that JPM does here on out
exposes their weakness further. Which they can not afford any more exposure
thus they are not buying back any more shares which is
the equivalent of cutting an artery in a pool full of sharks. The strategy they
are taking right now is to sit through the storm and ride it out as they can do
nothing else for any action will make them even more vulnerable. They can not
absorb hits in both JPM SLV and CDX.NA.IG.9. Inactivity is not something they
want to do it is something they have to do. There is no other choice for them.
So
what will happen if JP Morgan loses too much money?
Well,
it will beg the
There
is no way that they are going to let the largest bank in
In
addition, as I mentioned earlier, Dodd-Frank has put
Little
noticed is that on Tuesday Team Obama took its first formal steps toward
putting taxpayers behind Wall Street derivatives trading — not behind banks
that might make mistakes in derivatives markets, but behind the trading itself.
Yes, the same crew that rails against the dangers of derivatives is quietly
positioning these financial instruments directly above the taxpayer safety net.
One
of the things that Dodd-Frank does is that it gives the Federal Reserve the
power to provide "discount and borrowing privileges" to derivatives
clearinghouses in the event of a major derivatives crisis.
This
is what our politicians love to do.
They
love to have the
Our
politicians look at us as one giant insurance policy.
Apparently
they believe that if anything in the financial world goes wrong that
But
will we really have enough money to bail everyone out when the derivatives
market crashes?
Today,
the 9 largest banks in the
That
is approximately 3 times the size of the entire global economy.
The
How
in the world can we afford to keep bailing out the huge messes that Wall Street
makes?
Sadly,
most Americans have no idea how vulnerable our financial system really is.
It is
a poorly constructed house of cards that could come crashing down at any time.
If
you still have faith in our financial system you are being quite foolish and
you will soon be bitterly, bitterly disappointed.
