Global banking system getting ready to blow?
Remember the $2 billion derivative trading loss JP Morgan announced a little over two weeks ago?
It is getting bigger—a whole lot bigger according to a cnn report (May 20).
One thing seems clear about JP Morgan 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 JP Morgan Chase used to make its trades and from two sources with knowledge of the bank’s positions.
But there is also evidence that the bank’s losses may be set to get worse. According to the Independent, JP Morgan is in double trouble (May 22):
In a further blow, chairman and chief executive Jamie Dimon has suspended plans to use the U.S. bank’s own funds to buy back $15 billion 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.
If the bank has to cut its buyback program, you know things are worse than its executives are letting on.
But as usa Watchdog’s Greg Hunter notes, the reason jpm Chase is losing so much money is because it isn’t really a bank anymore—it’s a hedge fund. And hedge funds risk their clients’ money betting on anything from the weather to who is going to get elected to the White House.
Here is the situation JP Morgan is in (op. cit.):
“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 JP Morgan 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. ”There will be a stare-fest between the hedge funds and JP Morgan,” said James Rickards, former general counsel at Long-Term Capital Management, a hedge fund that required a $3.6 billion bailout from the Federal Reserve because of its massive losses from its trading activities. ”It will cost JP Morgan an unimaginable fortune to push the spread back in their direction,” he added.
And here is the situation that U.S taxpayers are in (ibid):
For now, the one thing working in JP Morgan Chase’s favor is the market’s bet that the bank is too big to fail, making it dangerous [for government regulators] to push too hard on the other side of its trade.
So America faces a dilemma: If regulators push JP Morgan Chase too hard to unwind its trades, to prevent further losses and thus a potential taxpayer bailout, JP Morgan will get crushed by the market, which will jump in to exploit the situation, thus necessitating a taxpayer bailout.
America’s banking system has become a giant casino where everyone plays with money borrowed from other people, who have borrowed from other people, who have borrowed from other people. Since most banks have lent out far more money than they have in assets, if one player goes bankrupt, it could have a chain reaction that could destroy the whole financial system.
JP Morgan Chase looks like it could be in trouble. And JP Morgan Chase is perhaps the most prestigious and important bank in America.
