but it looks like that's a lie. Amy Goodman had Bill Black on Democracy Now this morning and she asked him to explain what happened. Here's a transcript of how he explained it.
WILLIAM BLACK: Well, I can try. One of the things about this kind of derivatives is that it’s extremely opaque, and we only have JPMorgan’s side of the story at this point, without any real investigation, and JPMorgan’s story doesn’t make a whole lot of sense. But here’s what the story that they’re telling is. They had about $15 billion in distressed European debt. As your, you know, listeners and viewers know, Europe has been in just a ton of trouble. And so, those investments were losing all kinds of value. Now, the story, which, again, doesn’t make a whole lot of sense, is that they decided to hedge this position. A hedge is something where you invest in a second asset that is supposed to offset losses that you suffer in the first asset. In this case, the first asset was that distressed European debt, and the second asset, the supposed hedge, was a derivative of a derivative. In this case, it was an index of credit default swaps, which are a form of derivative that blew up AIG. Now then, the story gets even murkier, but it—the claim from out of JPMorgan is nobody was looking very carefully at the supposed hedge, and the hedge didn’t perform to offset losses, instead it increased the losses and increased the losses dramatically. And supposedly, no one was looking, and no one adjusted for this. And they woke up, and they had a $2 billion loss. So that’s the story from JPMorgan, as I said, that doesn’t make sense, and I can explain that, if you wish.
AMY GOODMAN: Explain.
WILLIAM BLACK: OK, so first, if you have distressed European debt, you’re supposed to have already reserved against the losses in it. So, why hedge the position at all? Just sell it. Get rid of these incredibly risky assets before they can suffer any additional losses. If you’ve already got loss reserves, you don’t even have to recognize a loss, because you’ve already reserved for it. So, you shouldn’t have had to hedge, period.
Second, if you were going to hedge, he should have hedged. And the way you would hedge something like this is to buy a credit default swap protection against the bad assets. That would hedge. In other words, if you lost on the value of the European debt, the credit default swap would go up in value, and you would be protected against loss. Instead, they have allegedly bet in the opposite direction by buying this derivative of a derivative. If the European debt lost value, the derivative of the derivative was also likely to lose value. Well, that’s not a hedge. That’s a double speculation in the same direction. You’re doubling down on the bet.
http://www.democracynow.org/2012/5/15/crony_capitalism_after_lobbying_against_new#transcript
= new reply since forum marked as read
