Weekend Economists Make Their Marx, May 18-20, 2012

[Demeter]

73. The Truth About JP Morgan’s $2 Billion Loss

http://www.washingtonsblog.com/2012/05/the-truth-about-jp-morgans-2-billion-loss.html

Before we can understand what’s really going on with JP Morgan’s loss (which will probably end up being a lot more than $2 billion), we need a little background.

JP Morgan:

Is the world’s largest publicly-traded company

Is the largest bank in the U.S. … the biggest of the too big to fail banks which are killing the American economy

Is the largest derivatives dealer in the world (and see this), and derivatives are inherently destabilizing for the economy

Essentially wrote the faux “reform” legislation for derivatives, which did nothing to decrease risk, and killed any chance of real reform

Is the creator of credit default swaps – which caused the 2008 financial crisis, and is the asset class which blew up and caused the loss

Has had large potential exposures to credit default swap losses for years

Has replaced the chief investment officer who made the risky bets with a trader who worked at Long Term Capital Management … which committed suicide by making risky bets

Went completely insolvent in the 1980s

… and again in 2007 (and was saved both times by the government at taxpayer expense)

Heads – with Goldman Sachs – the Treasury Borrowing Advisory Committee, which helps set government financial policy

Has a reputation of being the most risk-averse of the big Wall Street players

Was kept alive by a huge government bailout … but used the money to invest in India and other projects which won’t really help Americans

Has made a killing by kicking companies (and see this) and governments (and here) when they are down, engaging in various types of fraud (update), allegedly manipulating the silver market, and profiting on misery by acting as the largest processor of food stamps in America

In addition, JPM’s CEO Jamie Dimon:

Is a Class A Director of the Federal Reserve Bank of New York, which is the chief bank regulator for Wall Street (including JPM). Indeed, Dimon served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed’s emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns. At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank

Has a reputation of being the “golden boy” and smartest guy on Wall Street

Has been the chief spokesman and advocate for deregulation of banks, and has lectured, scolded and cajoled everyone who has questioned his banking practices

Jokes about a new financial crisis happening “every five to seven years”

What Does It Mean?

Pundits and consumers alike are reacting to JP Morgan’s loss like a startled herd of sheep. They somehow believed that the “best of the breed” bank and CEO – the biggest boy on the block – was immune from losses. Especially since JPM has been so favored by the Feds, and the government likes Dimon so much that he was being groomed for Secretary of Treasury. And the fact that the head cheerleader for letting banks police themselves has egg on his face is making a lot of people nervous. And that the biggest of the too big to fails could conceivably fail.

The government says it is launching a criminal probe into JPM’s trades.

Ratings services have downgraded JPM’s credit, and many commentators have noted that other banks may be downgraded as well.


Even CNBC is now calling for Glass-Steagall to be put back in place.

MORE