Taxpayer Supported Gambling

Derivative Scandals: Taxpayer Supported GamblingBy Greg Hunter’s 

The $2 billion derivative trading loss JP Morgan announced, about two weeks ago, is growing in size.  It is reportedly now more than triple the original loss.  According to a CNN report, “One thing seems clear about JPMorgan Chase’s $2 billion loss. It’s no longer $2 billion. It’s likely much higher.  The number being bandied about now is closer to a range of $6 billion to $7 billion, according to several people working on trading desks that specialize in the derivatives JPMorgan Chase (JPM, Fortune 500) used to make its trades and from two sources with knowledge of the bank’s positions.”  (Click here for the complete report from CNN.) 

The problem derivative losses seem to be growing for JP Morgan, and it’s affecting its share price in a negative way.  Yesterday, The Independent (a British publication) reported, “In a further blow, chairman and chief executive Jamie Dimon has suspended plans to use the US bank’s own funds to buy back $15bn worth of shares. Buybacks are a popular way for firms to use up cash sitting on the balance sheet and prop up the share price.”  (Click here for the complete Independent story.)  A trading loss big enough to halt a $15 billion stock buyback sounds like trouble to me, but that’s not really the big problem.

The largest banks in the U.S. were bailed out by taxpayers, and ever since the financial meltdown in 2008, all get taxpayer backing in the form of FDIC insurance.  The Federal Reserve is also providing near 0% interest rates to the banks while the banks provide savers with interest rates as measured in fractions.  JP Morgan may be the world’s biggest bank and holder of the most derivative exposure ($70.1 trillion), but it is far from the only big bank making risky derivative trades.  Too big to fail (TBTF) banks trading in derivatives are not like taking a risk on car loans, mortgage lending, startup companies or loaning money to help companies grow and add jobs.   The enormous risk the (TBTF) banks make is simply taxpayer supported gambling and nothing else.  Derivatives are mostly debt bets.

The Federal Reserve seems to not only support this activity but stress tested the banks for derivative trades in a March report.  (Click here for the Fed stress test for the big banks.)  Look at the Fed’s “Projected Losses, Revenue and Net Income before Taxes for Q4 2011 through Q4 2013 . . . Hypothetical Supervisory Stress Scenario.”  The Fed stress tested Bank of America for “$21.1 billion” in “hypothetical . . .Trading and Counterparty Losses.  Citigroup Inc. was stress tested for “$20.9 billion” in “hypothetical” losses in derivative trading.  Goldman Sachs was stress tested for “$27.1 billion” in “hypothetical” losses in derivative trading.  Morgan Stanley was stress tested for “$12.8 billion” in “hypothetical” losses in derivative trading.  Wells Fargo was stress tested for “$6.9 billion” in “hypothetical” losses in derivative trading.  Finally, JP Morgan was stress tested for “$27.7 billion” in “hypothetical” losses in derivative trading.

As we have seen in recent weeks, those “hypothetical” losses can turn into real losses.  But, that is the tip of the preverbal iceberg as far as taxpayer risk goes.  According to the Comptroller of the Currency, in the 4th quarter of 2011, the top five commercial banks alone had “$220.9 trillion” in total derivatives.  What I found frightening is how little assets some of these banks have compared to their total derivatives.  For example, Goldman Sachs had “$44.1 trillion” in derivatives with only “$103 billion” in assets!  That means for every $1 in assets, Goldman Sachs has $427 in risky derivative trades or, simply put, a staggering 427 to 1 leverage.  What could go wrong?  A 1% loss would cost Goldman Sachs four times the bank’s listed assets, and taxpayers would be on the hook for another bailout.  The TBTF banks will tell you that the risk is hedged and there is very little chance of loss.  JP Morgan is another in a long line that thought its derivative risk was minimal.

Investment banker James Rickards recently weighed in on derivative trading and said, “In fact, the bet is no more complicated than putting money on red at roulette. As a last resort, the executives hide behind the flag of free market capitalism when in fact they are the new welfare queens with government subsidies galore. The whole thing is a disgrace. If Jamie Dimon had an ounce of decency, he would resign now. Not because his acts were criminal, but because he presides over a corrupt institution that extracts wealth from the many and directs it to the few with no value added and not even a nod in the direction of the hard-working American victims of this scam.”  (Click here for more from Rickards from

Before it’s all over, the other TBTF CEOs will be asked to resign because of future derivative scandals.  The cracks in the derivative markets are going to turn into canyons.

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  1. art barnes

    Greg, the big banks are all hiding their exposures and their real present day balance sheets, waiting for their brother the FED to send them more, which it will. I predicted two weeks ago that JP Morgan was announcing a small loss as a trial balloon which later would rise, and which also was a shot over the bow to the FED to send more reserves. 7 billion is a joke, just wait till the truth is told (in 10 years). JP Morgan’s cancellation of its 15 billion buy back is certainly an indication that the bank is feeling the crunch of on hand reserves (money). The real picture will not be allowed to go public, like the 2008 secret huddle between the Government, Treasury Dept, and the big too big to fail banks, a deal will be struck to save the banks causing serious inflation for working Americans. JP Morgan Bank is not a friend of the working class of America and its brothers and sisters, B of A, and the rest of the banking class elite will be the final destruction of main street. The banks don’t need working class depositors to stay big shots as long as their Dutch uncle the FED continues to send then free money. This will last until the house of cards falls down to inflationary pressures from their dirty deeds and back room deals.

    • Greg

      Spot on prediction man. Thanks for the analysis and comment!

  2. This guy

    Not to be paranoid, but the more this kind of thing happens, the more it all seems pre-planned…

  3. overtheedge

    With the decline in the economy and the gutting of American production industry, there are few options for banking profits from loans.

    Factor in the new reality where stock price speculators have replaced stock investors, and the stage is set for the extreme demand of higher profits to buoy up the stock price. In order to capture higher profits, risks must increase.

    Few are willing to realize that counter-party risk demands that the counter-party has the assets to cover their risk. Factor in CDS and now we have the problem of the insurance premiums fail to be commensurate with the financial risk. Do I hear the sound of trumpets outside the Wall Street of Jericho?

    Perhaps we should assume that the bail-outs cover the bond-holders and stockholders simply because poor people don’t hire employees or start companies that do. Maybe the poor folk oughta take in one another’s laundry. Yah, that’ll work too.

  4. ManAboutDallas

    The world has always operated under “The Other Golden Rule”*; circumstances have now made this obvious to all, at least to those whose brains haven’t been atrophied by too little critical thinking and too many current cultural distractions.

    So, where do we go from here ? Well, we hasten the inevitable collapse in any way we can. The faster the collapse, the sooner the rebuilding a new, solid, non-casino economy can begin.

    For what it’s worth, look for a spectacular rally in the Euro the minute Greece says “No mas!” and punches the “Eject!” button. Or just gets pushed.

    *TOGR: “He who has the gold, makes the rules.”

  5. George Too

    Great article Greg! 427 to 1…Wow, you don’t get odd like that in Vegas

    • Greg

      Thank you George Too for the comment and for your participation in this site.

  6. David Conrad

    You are right Greg …. time to buy gold!

    • Greg

      David Conrad,
      If you got it hold it no matter what the price fluctuations. Thank you for weighing in.

  7. M SMITH

    Greg, the cental planners have planned us right out of a nation, China owns more power over our gov & banking system than we do, now that is a sad fact, yet true. Not much more to say but one thing, keep GOD in your heart!

    • Greg

      M Smith,
      Amen to that!

  8. Another guy

    Hey Greg…gonna piggyback on “this guy’s” comment about being preplanned and ask fornan opinion. I’ve listened to Lindsay Williams a couple times as I imagine a lot of your readers have and don’t know whether I should take what he says seriously about the “elites” planning this junk or not. Seems like what he says could be very plausible but of course it could be seen as paranoid. He says to look for cracks in the derivative market… Morgan seems like a crack. Any thoughts?

    • Greg

      Another Guy,
      I don’t know whether or not Lindsey Williams gets information from his elite friends (my gut tells me he does) but the math is terrible. The leverage in the derivative market is enormous and we have never seen this before in human history–never! Plenty can go wrong, especially in all things paper. Lindsey Williams is spot on about that point. The math says hes on target. Yes, I feel JP Morgan is a a crack and before it is over the cracks will turn into canyons. You better have something other than an IRA or 401-K to back up your wealth protection strategy. Forget the talk about this effecting the kids and grand-kids. That’s 80’s and 90’s talk. The hell we face is in the hear and now I hope people take the necessary steps to protect themselves. I am not talking about making some fast money trading. I am talking insurance and protection from financial calamity. Get it ASAP.

      • Samantha in Tucson

        I guess I wouldn’t feel so suspicious ( for lack of a better word here)about Lindsey if he didn’t continually sound like a televangelist with all the hawking he does of his DVDs, etc. This club – “Prophecy Club” just sounds too much like a Jim Baker/PTL Club type-scam.

        We listen to Lindsey occasionally; my husband now calls him “Flimsy Williams”. Why on earth would the “elite” of the world have conversations with this man? So he can sell DVDs? Doubtful.

        Sorry, Greg; I have to speak out on Lindsey. He moved from Kansas to Arizona (Phoenix area).

        • Greg

          I think the hype on the DVD is a turn off as well. I try to always name my sources.

      • M SMITH

        Greg, please read this I came across, it is more than a crack, it a earth quake at 9.9 & getting bigger!

        Yes Greg, do men fear GOD? Yes! Why? The evil from the king of Hell is real! The more I think about it, all of what I have read & listen to by Rev Williams is as true as it gets! Contact Alex Jones ASAP for more updates that are coming daily!

        Greg, GOD is all around us,keep him in your heart, they can take all but the love GOD gives us they can never touch! GOD is the light!

      • art barnes

        Greg, wow, wow, wow, what a comment, ,,,”Forget the talk about this effecting the kids and grand-kids. That’s 80′s and 90′s talk. The hell we face is in the hear and now…”. How true, how true, its not if but when, hell, any fool could see if he or she would only let themselves see.

        • Greg

          Thank you Art. I’m just trying to keep up with you man!

  9. Ambrose


    Last week I watched The McLaughlin Group (5/18/2012 issue, and saw both Mortimer B. Zuckerman (the Chairman and Editor-in-Chief of U.S. News & World Report and the publisher of the New York Daily News) and Richard Lowry (the editor of National Review) were defending for JP Morgan Chase. Both Zuckerman and Lowry tried to convince others that JP Morgan Chase was conducting a normal business and the $2 billion loss was nothing more than a regular business loss. Lowry further said that kind of business loss (or gain) happens all the time in free economy. No wonder Wall Street gambling is more popular than Las Vegas.

    The show also quoted Mitt Romney’s statement in The Ed Morrissey Show (May 16), “… this was a loss to shareholders and owners of JPMorgan and that’s the way America works. The $2 billion JPMorgan lost, someone else gained.” I don’t think that is the way America works – although it is probably how Wall Street works.

    I watched several other shows on PBS and MSM and I was surprised that most of them didn’t even mention the word “derivatives”. Most of them didn’t talk about the trillion dollars of derivative exposure referred in the 4th Quarter 2011 OCC report. I felt that most media avoid talking about the risky derivatives. Could it be their bosses are all tied to derivatives trading themselves and they don’t want to fuel the JP Morgan Chase fire?

    Sometimes I feel like the big banks are regulating the SEC and not the other way around.


    • Greg

      Thank you for your analysis and content!

  10. robert heartland

    I keep wondering what my father would think of this were he still alive! He was an MIT graduate and an aeronautical engineer for Grumman. He was a logical “No nonsense” kind of a guy. I bet he and I would agree on one thing though if nothing else,these banks are crooked and the too big to fail the most crooked. It is also no accident that they have taken over our news media and government. The Super Rich have been our real enemies all along. How do I know this? Just look at the obvious two sets of laws in operation in America today! George Bush and his buddies,John Corisine with MF Global and on and on. While you and I go to jail over parking tickets! We protest Jail and a strip search. Pretty soon they will shut down the internet for free speech. They are the ones who hate our rights.

  11. nm

    Hi Greg:

    You’ve been sounding this warning for quite some time, but it appears that Bernanke (& Obama) are going to print and save the banks, no matter what.

    So, if that’s the case, will there be a big explosion or will we just slowly ease into higher and higher inflation? i.e. they’re clearly going to inflate their way out of the debt and they’ve decided to do it slowly over time (& it appears to be “working”) — so, why do you think it’ll blow up?

    • Greg

      The ammount of leverage is enormous. 4 banks alone have $220 trillion in derivative exposure. Anything can happen. It is now being reported that JP Morgan’s 42 billion loss is now around $7 billion and rumor is that it is really North of $30 billion. Thank you for youe comment and question.

    • Marcel

      ‘Bernanke (& Obama) are going to print and save the banks, no matter what.’

      Not if China refuses to sell them the ink and the paper,but then the crooks in Washington could always make cow pies legal tender.

  12. seanie mceniff

    Such kind of gambling platform for taxpayers is really appreciable. This makes an effect and inspire those people who do not pay tax.

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