JP Morgan Black Swan?
By Greg Hunter’s USAWatchdog.com
The surprise announcement by JP Morgan that it lost $2 billion in trading derivatives was portrayed in some mainstream media outlets as no big deal. The Associated Press reported Friday, “Bank stocks were hammered in Britain and the United States on Friday, partly because of fear that a surprise $2 billion trading loss by JPMorgan Chase would lead to tougher regulation of financial institutions. . . .”The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought,” CEO Jamie Dimon told reporters on Thursday. “There were many errors, sloppiness and bad judgment.” (Click here to read the complete AP story.)
I think the market thinks this $2 billion surprise loss is much more than fear of “tougher regulation,” or that it was just “sloppiness and bad judgment.” Remember MF Global and its bankruptcy on Halloween last year? It, too, was trading in risky derivatives, and it lost $6 billion that wiped out the firm along with $1.6 billion in segregated customer cash. In the aftermath, we still do not know where the customer money is, but we did find out MF Global was leveraged 40 to 1. It would be hard to believe other big banks were not leveraged in risky derivative trades the same way. This is why traders on CNBC were hitting the panic button last week. Joe Terranova said, “I will dump my Bank of America on this news.” Other traders on the show were equally scared. “I can almost guarantee it’s not just JPMorgan,’ added trader Guy Adami. ‘JPMorgan looks like it’s going to bring down the entire space,’ said Steve Grasso.” (Click here for the complete CNBC story.)
The only way JP Morgan could “bring down the entire space” is if the entire space was leveraged in ways similar to JP Morgan. Of course, no U.S. bank has more derivative exposure than JP Morgan. According to the Comptroller of the Currency, JP Morgan has a little more than $70 trillion in total derivative exposure. (4th quarter 2011 OCC report) The next 4 commercial banks have a combined $150 trillion (approximate) in total derivative exposure. I am sure the banks will tell you that this is all hedged (bilaterally netted) to minimize any losses, but we all know how well that strategy worked with AIG, Lehman and MF Global.
I am not the only one worrying about JP Morgan’s $2 billion dollar surprise trading loss. Friday, one of the big debt ratings companies downgraded the troubled bank’s debt. CNN reported, “The closing bell brought no relief for JPMorgan Chase on Friday, as a major credit rating agency moved to downgrade its debt almost exactly 24 hours after the bank revealed a $2 billion trading loss. Fitch Ratings downgraded both JPMorgan’s short-term and long-term debt, with the latter falling to A+ from AA-. The bank, the country’s largest by assets, was also placed on ratings watch negative. Fitch said it views the $2 billion loss as “manageable” but added that “the magnitude of the loss and ongoing nature of these positions implies a lack of liquidity.” (Click here for the complete CNN.com story.)
With the “ratings watch negative,” it doesn’t appear that JP Morgan’s derivative troubles are over, does it? Renowned money manager and investor Rick Rule thinks what happened to JP Morgan could not just bring down the bank but the entire financial system in a replay of the 2008 meltdown. In an interview Friday with King World News, Rule said, “There would seem to be a mismatch of some amount of money in the $100 billion range between credit default swaps. They seem to have been net sellers or providers of about $100 billion in unhedged credit default swaps. When I say seems, these are extremely complex instruments. Investors should be aware that derivatives such as these can bring down the entire banking system. . . . It’s just an example of the potential black swans that exist in a very, very leveraged banking environment.” (Click here to read and hear the complete KWN interview with Rick Rule.)
I am not saying that JP Morgan is going out of business anytime soon, but if the bank does get in to more trouble and there are more losses, how much will it cost to save them? What if the other big banks are in the same spot? Does there come a time when the big banks are no longer too big to fail but too leveraged to save? Did JP Morgan just turn into a black swan?
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About the Author
Greg Hunter
Greg is the producer and creator of USAWatchdog.com. The site’s slogan is “analyzing the news to give you a clear picture of what’s really going on.” The site will keep an eye on the government, your financial interests and cut through the media spin. USAWatchdog.com is neither Democrat nor Republican, Liberal or Conservative. Before creating and producing the site, Greg spent nearly 9 years as a network and investigative correspondent. He worked for ABC News and Good Morning America for nearly 6 years. Most recently, Greg worked for CNN for shows such as Paula Zahn Now, American Morning and various CNN business shows.
This should demonstrate that nothing in the financial world has changed. The Wolves are still watching the sheep. I would expect much worse news in the coming months, regardless of the “election mode” the MSM is in for the current president.
Thank you Lew.
Greg
When the derivatives come crashing down, (and some estimates are more than 1 QUADrillion in outstanding derivatives floating around*) the banks will expect us to pay them back for all the money they stole.
*See http://www.bullionbullscanada.com/commentary/us-commentary for some explanations of the financial crisis/derivatives.
Greg, I believe JP Morgan’s losses are greater than 2 billion, they may tried a trial balloon of 2 billion to ease the panic. Then latter, say in a week or a month, other higher figures will emerge.
We’ll just all wait and see about that, but I do believe if Morgan is hurting because of derivatives the other banks are deep into the soup as well. After all, they all were feeding out on the same carcass.
As to too big to save, don’t ever believe that, the FED will throw a little bank off the cliff but give its buddies, the big boys, a safe haven. This may have been a shot over the FED’s bow to send some reserves over as well; and quick. Further, I found the stock closed
about 10 percent below open on Friday, clearly not in line with the announcement, expect a few more points downward as the “boys & CNBC” figure a way to play this into a “buy signal”. Good reporting as usual, and very timely.
Thank you Art for the analysis. I think you are correct. I wonder if JP Morgan’s capital was wiped out and they are keeping that secret? Who knows?
Greg
Seems the problem is there only way out…keeping everything secret.
If this was indeed a ‘black swan’ event, the according to Taleb’s analogy we should avoid being the ‘turkey’ by keeping a sharp eye on the ‘butcher’. But who would be the butcher?
Hmmmm. It looks like the much anticipated QE 3 will go directly to the banksters. TARP II anyone?
Greg,
This is the reason that the banks paid back their BS TARP money early– so that they could get on the high risk wagon again. Anybody want to wager whether or not these clowns will hit up the American citizen yet one more time. Jim Willie says that the 2 Billion number is way-l-o-w –much like Moonbeam Brown’s budget numbers.
” The bank holding companies, among them American Express, Goldman Sachs, JPMorgan Chase and Morgan Stanley, plan to return a combined $68.3 billion. That represents more than a quarter of the federal bailout money that the nation’s banks have received since last October, when many feared that failures might cascade through the industry.
But the decision to allow the banks to exit the Troubled Asset Relief Program, or TARP, also ushered in a new, and potentially risky, phase of the banking crisis. Letting the lenders out now — earlier than many had envisioned, and without the industry reforms some consider necessary to prevent future crises — raises many sobering questions for policy makers, bankers and taxpayers.
The program was aimed at purchasing assets and equity from banks to strengthen them and encourage them to expand lending during a tightening credit squeeze. But after banks return the TARP money, the administration will forfeit much of its leverage over them.”
Bring back Glass-Steagall !!!!!!!!!
Martin,
Yes bring back Glass-Steagall!! Thank you for the comment and analyis.
Greg
Greg,
Good articale and Absolutely on the Glass Steagall. When the banker were in dire need of capital we finally had the ability to force upon them needed changes. As soon as they have the appearance of being well they get out and start protesting against regulations. It is kinda funny that Dimon was so vocal.
This is the tip of the iceberg….again.
Bob
Thank you Bob.
Greg
$2B known so far.
It is far too early to assume that the infection is NOT systemic. All hedging presumes a counter-party risk. Ergo the counter-party hedges their risk. Effectively we have everyone insuring against everyone else’s risk. The low premiums obviously won’t cover the risks.
And the band plays on.
eric
Anyone who is watching knows that Bankrupt of America and other members of the TBTF clan shifted their derivative exposure to the FDIC system. This move was completed a few months ago and it put the taxpayer on the hook for $100 trillion derivatives once they declare bankruptcy. This coupled with the reset of the bankruptcy laws involving hypothecated investment vehicles will be used by the banks to retain the “physical property” while shifting the debt to the taxpayer.
We are truly being held hostage by this move which will push the need for more bailouts to save these banks and only then will the TBTF be slowly dismantled at a profit for the banks and a debt for the people.
http://www.zerohedge.com/news/bank-america-forces-depositors-backstop-its-53-trillion-derivative-book-prevent-few-clients-dep
Hi Greg;
Good article.
I believe this first announcement by JP Morgan is simply the tip of the iceberg.
Other banks have similar problems with their derivative exposure. Bunch of them lost money with the Greek debt problems.
According to Max Keiser, JP Morgan literally threatened the life of Joe Corzine if he didn’t pony up to cover their losses that he made in his 40:1 bets on European bonds.
If they were willing to do that for 1.6 billion, what will they do to the guys that lost them 2 billion? My guess is those guys better watch their back.
Ever get the feeling that you are reporting on a bunch of global crime lords and mafia dons Greg?
These people aren’t businessmen. They are criminal gangs.
-Ken
Ken,
Interesting!! This is far from over. Thank you for the info.
Greg
In Siver Doctor’s today:
Headline: JPMorgan’s $120 Billion Problem: SEC Issues JPM Wells Notice Over MBS Violations
It states in the end;
“The SEC Wells Notices means that JP Morgan is staring at the distinct possibility of having to buy back $120 BILLION in now worthless mortgage backed securities if any of these suits ever made it to court, ensuring massive settlements WILL OCCUR.”
http://www.silverdoctors.com/jpmorgans-120-billion-problem-sec-issues-jpm-wells-notice-over-mbs-violations/
Now that looks like JPM’s really in the hurt locker now.
MC
Thank you MC for the continued reporting.
Greg
Hi!, Patrons Of USA Watchdog Et Al:
Does anyone remember what the Senior J. P. Morgan told OUR Congress many decades ago when he appealed to Congress by stating: “Gold is money and all else is credit”? What a far cry from the Senior J. P. Morgans’ sound money principals the banks worldwide have strayed.
Bringing this sceen forward to today’s world, we do remember when Dr. Ron Paul in a Congressional hearing during 2011 asked our present Fed. Chairman, Helicopter Ben Bernanke, if Mr. Bernanke, as our head money man of OUR Nation, thinks of gold as money and Mr. Bernanke’s response was an emphatic “NO!” Our banking world has traversed to exactly the opposite sides of the implications brought to OUR Congress’s attention decades ago by Mr. Morgan and more recently by Dr. Ron Paul and so what is the excuse for our banking system not heading Mr. Morgan’s and Mr. Paul’s sound economic perspectives? However, it would appear that not heeding Mr. Morgans’ and Mr. Paul’s sound economics is catching up with our entire world banking system to the extent that either they will prove too big to salvage or eventually through their own policies of currency destruction, they will devise their own demise? The sooner the better but as it happens “look out below!”
RUSS SMITH, CALIFORNIA
I’ve been watching the various networks and the talking heads are all speaking the same set of lines: more regulation and standardization across global markets.
My read is the banks control government, then set up a series of failures to assure.that the people demand more oversight, giving those private interests who already control policy dominance over the remaining institutions.
In the end, the short term loss and sacrifice by some of the biggest banks will result in their leadership achieving full control of global regulatory bodies, with the ignorant/misinformed people.nodding their heads in approval of the increased centralization and stranglehold over power by private interests.
A very precarious situation indeed with JP Morgan…
Got gold???!
I’m a bit confused by this. From reading and following Peter Schiff’s analysis, he has been very clear all along that all five of the largest banks in the US are (& have been) insolvent.
The only reason (according to Schiff) that their insolvency hasn’t come to light is because of manipulated accounting rules (not requiring them to mark to market) and because of the “free” money they’ve been getting from the Fed.
So, this $2 billion dollar loss should not be a surprise to anyone and in fact is just the tip of the iceberg. How can JP morgan or any of the other banks NOT get into more trouble Greg?
For all intents and purposes, they are insolvent and are only able to make money by borrowing at 0% interest rates from the Fed. Take this option out and/or force them to mark to market and the whole house of cards will come crushing down.
What am I missing here?
NM,
You are not missing anything. I have been talking about FASB’s rule change since it was enacted in 2009. Yes the big banks are insolvent and so are many in the EU.
Greg
Poor JP Morgan Chase. More bad luck. Since they have stated that the amount of the “dumb” loss was only 2 billion, it is no doubt probably 10 or more. Do you hear the phone ringing in the other room? That’s Jamie Dimon calling Ben B. for more taxpayer money.
Greg,
It is no big deal that JP Morgan Chase lost $2 billion in trading derivatives. When the Federal Reserve reported that JP Morgan Chase and 14 other big banks passed the latest round of stress tests back in March (2012), Wall Street reacted favorably. JP Morgan Chase stocks were up 7 percent. Shortly after the release of the stress test results, JP Morgan Chase announced that it would buy back at least $15 billion of its stock through 2013.
If JP Morgan Chase lost $2 billion, then it probably won’t buy back as much stocks as planned. Also, as the largest U.S. bank, it is under the Fed’s “too big to fail” protection and assured for a bailout if it needs one.
There are several defects in the Fed’s stress tests. The Fed’s stress tests determine if the banks would have enough capital to weather a peak unemployment rate of 13 percent, a 21 percent drop in housing prices and severe market shocks, as well as economic slowdowns in Europe and Asia. However the stress tests do not take into accounts of the effects of:
– The financial derivatives mess (caused the last great market crash in 2008);
– The growing number of toxic assets possessed by the banks;
– The misrepresented data released by the government (for example, the current unemployment rate is 22.3% based on SGS – much higher than the 13% limit set by the Fed’s stress tests. Yet the unemployment rate released by the Labor Department is only 8.1% – both misleading and impractical for the stress tests.);
– Whether some banks are cooking their books – inflating earnings and understating losses.
I bet the loss of JP Morgan Chase is just a tip of the iceberg. There may be more bad news from the other banks in the coming months. Fortunately Bernanke never rules out the possibility of QE3. Anything could happen in the financial market, especially in election year. Beware!
Ambrose
I don’t see how exposure to 70 trillion in bad bets makes you anything less than insolvent, and funny how David Gregory didn’t bring that up or the issues with MF Global when Jamie “the rat” Dimon was on Meet the Press yesterday. Wait till Greece and Spain go belly up and all those CDS’s need paying off, Chase will be vaporized!
Withdrawal anyone? Why have we not heard from the FDIC police yet. I see the threat of people flooding the banks to get their money any day and the dominoes begin to fall. I too believe this is the tip of the iceberg and when it upends, the wave will knock out the foundation of not only the major banks, but the smaller and (Safer) banks leaving FDIC holding the bag. Does anybody know the current amount of coverage FDIC has available as of today? Look for a QE-FDIC in our future.
Disregard the Dow, NASDAQ, S&P…
Potential stages of coming debacle imo:
* DERIVATIVES Collapse
* Currency Battles
4 Trade Wars
5 Dissolution of Euro
Thank you David for the crisp analysis of the current financial state of the world!
Greg
If I understand this right, any bank,ie: jp morgan gambles with “my” money to make money for themselves, not “me”. My tiny interest rate I get for having my money in their bank is “peeenuts”. So really all these derivatives are a gamble, high risk game of the board game, monopoly.
I wish I didn’t have a loan with my bank (jp morgan), I would be out of there in a second.
Greg, if jp morgan takes a big hit, do you have any idea what might happen to my loan? Thanks for reading, I don’t know who else to ask the question to. Thanks.
Steve
I suspect the bank that gets JP Morgan’s assets (your loan included) will just take over keeping track of your payments. In short, I’m afraid you will still owe the money. Thank you for your question and comment.
Greg
Oh, yeah. There’s going to be bodies floating face-down in the Hudson ( and elsewhere ) before this sordid chapter comes to a close. The “London Whale” is going to be walking around with a 20-foot harpoon stuck you-know-where. Get ready for the “QE to infinity” that Sinclair has been envisaging for … well, for years now. There’s no other way out. And while we’re waiting for the rest of the Black Swan Squadron to come in for a landing ( be sure you’re wearing a hat and DON’T LOOK UP! ) … do EVERYTHING you can to hasten the implosion and FINAL COLLAPSE !
ManAboutDallas,
Happy to have you commenting on this one. b Your are quite colorful!!
Greg
Greg, they always find a way to bail out these wall st crooks, but over in Japan the NCR & TEMPCO will not touch the 27 billion dollar fund they have to store spent nuke fuel rods in ‘dry cast’! The powers to be only care about one thing, stealing money from the middle class & poor to keep failed banks & corps running so they grow richer! JPM knew they had a huge problem in more than just OCD’s, also all of the the commodity markets. Bad bets in coal was talked about by Jim Rogers long ago, but it never made the MSM!
This site is a great place for true info about Japans nuke plants & our problems that is just waiting to happen. http://www.fairewinds.com/multimedia. We as a nation are hanging on by our finger nails, all it will take is mother nature to show her strength & we want worry a damn bit about any bank failures! Black Swans every where it seems & more on the way, bet on it!
Thank you M Smith.
Greg
GREG: IF THE BANKING SYSTEN NEEDS TO BE SAVED AGAIN,AND IF THE REST OF AMERICA FEELS AS I DO, I STRENUOUSLY HOPE OUR CONGRESS [HOUSE AND SENATE] DOES NOT BAIL THEM OUT AGAIN. THE WAY I SEE IT, THE END IS GOING TO BE HORRIBLE FOR THE WORLD, INCLUDING THIS CONTURY. SOONER OR LATER, WHETHER BY DEFLATION OR UNCONTROLLED INFLATION/HYPERINFLATION THE END WILL COME. BAILING OUT THE BANKS MEANS, THEY WILL COME OUT OF THIS TRAGEDY WHOLE, OR AT LEAST IN FUNCTIONAL SHAPE. MOST EVERYBODY ELSE WILL BE DESTITUTE. [SOVERIGN STATES,BUSINESSES LARGE AND SMALL, AND CERTAINLY MOST PEOPLE. THE POINT I’M MAKING IS IF WE HAVE TO GO, IT’S BETTER TO TAKE THE TBTF BANKS WITH US. LEVEL THE PLAYING FIELD TO THE EXTENT POSSIBLE. LEARN FROM OUR MISTAKES, REGAIN OUR CONSTITUTION / BILL OF RIGHTS, ESTABLISH A SOUND MONITARY SYSTEM, GO BACK TO CAPITALISM, NOT CRONEY CAPITALISM, AND A MODE OF THINKING WHICH IS, WHAT’S GOOD FOR OUR COUNTRY. I GOT A TASTE OF WHAT THE TBTF BANKS AND WALL STREET DID, AFTER THE FIRST BAILOUT. IF LEFT WHOLE, AND THE REST OF THE COUNTRY IS LEFT DESTITUTE, WHAT WILL LIFE BE LIKE FOLLOWING THE CRASH!!!
Armand,
I am afraid it will be (as Jim Sinclair says) QE to infinity. You got to asking yourself right now “What else can be used as money?”
Greg
Isn’t it nice Ina Drew taking one for the team? At age 55 and a thirty year employee pulling down an annual salary of $14 million – before bonuses is retiring. I wonder how long it took to find her and what the pay off will be?
A den of snakes all protecting the king cobra.
Morgan is a big parasite that ought to be exterminated.
I think what we are seeing in JP Morgan’s loss is the aftermath of the Greek default. Someone had to pay. JP Morgan probably held most of the derivatives on Greek bonds, couldn’t sell them because there is no market, and any admission to that fact would send a panic through the markets. It is much better for them to say I’m not really sure what happened, kind of like what Corzine said. I wouldn’t call this a black swan event, it’s more like a black swan genocide.
Time to starve the bastards with Lawful Money, cannot be fractionalized.
You will pay No income tax on it. It becomes Tax Free Money.
http://www.stormthunder.com
Move along. Nothing to see. Everything will be taken care of.
It is mind boggling that nothing is ever done to correct the problems. The occasional sacrificial lamb or bandaid is all we ever get. Lots of speeches or legislation that has no teeth in it. A political season that gives us a run around to the tune of musical chairs. There is no accountablity and there will never be any accountablity. Why? Because we just can’t force ourselves to act to make them accountable. Them? It is always, Them! How about US? I mean they have done so much to US that I can hardly remember all the incidents and this for all pratical purposes is just another scam perpetrated on US. WHY? Because they can. They have no fear of US. They make the laws and have a gigantic law enforcement agency and if need be, a military to enforce them.
How many of US read these excellent articles and just burn in our seats? They never let a good crisis go to waste and they are willing to enact more laws. Well, Congress, how about Glass-Steagall, you dumb idiots! It must be a terrible burden to balance the lobbyist contributions against doing what is right for our country. Just enough to keep thier constituents under control.
The real Black Swan, is what we have allowed to happen to our country over the past forty years and it covers a multitude of sins. It is not in the future, it is now. If part of the definition of a Black Swan, is that you never see it coming, then we are truly blind.
Great article. When will be ever learn that big financial institutions will gladly destroy us in pursuit of profits? Glass-Steagall? Definitely. I’m a free market guy but we also need to regulate financial sector executive pay and parachutes.
John,
One of the best regulatory tools is bankruptcy. Glass Steagall separated the insured from the uninsured institutions. If an investment bank wanted to roll the dice then bankruptcy was their reward if the bet went wrong. That is a powerful regulatory tool because it forced bankers to regulate their risk. Now, all banks are insured by the FDIC and that is a giant crime against the public. Thank you for your comment.