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JP Morgan Chase for Dummies

May 11, 2012 Leave a comment

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Breaking News:

JP Morgan sent out a notice at 4:30 p.m. that it would be holding a conference call at 5 p.m. which will include CEO James Dimon.

At the conference call, as reported by WSJ, Jamie announced that the the largest US bank has “taken $2 billion in trading losses in the past six weeks and could face an additional $1 billion in second-quarter losses due to market volatility”.

Here’s a Dummy trying to make sense of Wallstreet speak.

The losses stemmed from derivatives bets gone wrong in the bank’s Chief Investment Office, a part of the corporate branch of the bank that manages risk… Jamie announced.

So they lost $2 billion in 6 weeks and possibly another $1 billion over the next month. But what exactly are these derivative bets? Isn’t betting associated with gambling? Did the largest bank in the US take some of their bailout money, went gambling and now calling a press conference to announce their losses?

Mr. Dimon said the so-called synthetic hedge, using insurance-like contracts known as credit-default swaps, was “poorly executed” and “poorly monitored.” He said the bank has an extensive review underway of what went wrong, and that there were “many errors,” “sloppiness” and “bad judgment” on the bank’s part.

Ah… it’s not gambling, it’s actually a “synthetic hedge”. But I don’t even understand what’s a hedge, never mind the difference between synthetic and real! All I know up to this point is they lost big time through derivatives bets, which is a synthetic hedge, also known as credit-default-swaps. That’s quite a mouthful for a mere mortal.

What then are these credit-default swaps?

I know what’s a swap. You give me something, I give you another. But they’re  swapping “credit-default” for something else? That sounds like a weird thing to be swapping. Fortunately I have good ole Wikipedia to the rescue:

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults.

Oh, how could I have missed something so obvious! Didn’t Mr. Dimon say it’s an “insurance-like” contract? Now I get it, so I’ll just call it an insurance. JP Morgan sells insurance and receives an insurance premium. It works something like this: You lend me money, then buy an insurance policy from JPM saying that if I fail to repay your loan when it becomes due, they will pay you for the sum insured.

But insurance companies do payouts all the time. What’s the big deal? Then I recall that when there’s a major disaster - like the recent Christchurch earthquake, the payout was so big that AMI, the insurer, went under and had to be bailed out by the government to the tune of NZ$1 billion.

Now it begins to make sense why the conference call was made in such a haste. I recall that Greece defaulted in their debt triggering a payout around a figure of $3.5 billion, and I know JP Morgan is one of the major insurers and major holders of other types of “insurance contracts” collectively known as OTC Derivatives.

But how big exactly is JPM’s potential liability to these kinds of bets?

According to the Bank of International Settlements (BIS), which is the Central Bank of all national Central Banks, the total outstanding OTC Derivatives is $708 Trillion. Of this total notional amount,

  • 67% are interest rate contracts,
  • 8% are credit default swaps (CDS), 
  • 9% are foreign exchange contracts,
  • 2% are commodity contracts,
  • 1% are equity contracts, and
  • 12% are others.

Since CDS makes up only 8% of the total OTC Derivatives, and a relatively minor default by Greece caused such a significant loss for JPM, imagine what will happen to JPM and the likes of JPM when the other PIGS countries ( Portugal, Italy, Greece and Spain) actually go into default. Also imagine what will happen when the interest rate contracts, comprising the bulk of OTC Derivatives actually triggered?

There must be good reasons why derivatives are referred to as Financial Weapons of Mass Destruction (WMD).  Trying to time the explosion or implosion of this WMD is futile. Preparing for its consequences is vital. Take a look at the chart below, and see if you can spot where in this crazy world of finance is the safest place to be.

Mouse over each bar for details. Click to read data source

JP Morgan CDS OTC Derivatives

Updates:

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Categories: Articles by PoliticalMetals, News Tags: , , , , , , , , ,

Greece Nears a Tipping Point in Its Debt Crisis

September 19, 2011 1 comment

By Jack Ewing | NYT

FRANKFURT — Europe appeared to be lurching toward a moment of decision in its sovereign debt crisis Sunday, as Greece struggled to meet conditions for additional  aid amid rising German impatience with the cost.

Prime Minister George A. Papandreou of Greece canceled a planned trip to Washington to meet with his cabinet Sunday, in what looked like an increasingly desperate attempt to show foreign benefactors that the government can keep the promises it made in return for aid. Without the aid, the country would certainly default on its debt, an event that economists have warned could lead to bank failures in other countries and ignite another financial crisis.

“Greece’s imminent default is assured,” Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in an e-mail Sunday. “Without an injection of cash within the next weeks, the nation will run out of resources to service its debt.”

Other analysts are less pessimistic, arguing that European leaders will do what is necessary to save Greece once they are confronted with the ugly ramifications of a default. These might include having to rescue banks, particularly in France and Germany, that have large holdings of Greek bonds, as well as putting even more acute pressure on other highly indebted euro zone countries like Italy and Spain. In the worst case, the euro could come apart, setting back the cause of European unity by decades.

When political leaders do the math, they may realize it is cheaper to save Greece than engineer a bank rescue only two years after the last round of bank bailouts, analysts said.

“You can stabilize the banking system and let the sovereign go through the roof, but that is not the most efficient way to do it,” said Guntram B. Wolff, deputy director of Bruegel, a research organization in Brussels.

Still, political leaders outside the euro zone have displayed concern that the European approach to the crisis lacks urgency. Timothy F. Geithner, the U.S. Treasury secretary, attended part of a meeting of European finance ministers on Friday and Saturday in Wroclaw, Poland. It is rare for a U.S. official to attend such a meeting, known as Ecofin, and it was Mr. Geithner’s first time.

“I can’t remember the last Ecofin meeting a U.S. Treasury secretary has attended,” said Nick Matthews, an economist at Royal Bank of Scotland. “It is a clear signal of how serious the sovereign debt crisis has become and an indication that it has gone beyond Europe and is threatening on a global dimension.”

The finance ministers failed to make substantial progress toward resolving the debt crisis or to make any pledge to recapitalize Europe’s banks.

> More from Source

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… and here’s Andy Hoffman aka Ranting Andy’s take on this crisis

Ranting Andy Special: The Central Banks Can’t Win

RANTING ANDY – It’s another one of those days where I have too many thoughts in my head, making it hard to focus on just one.  The pace of GLOBAL ECONOMIC COLLAPSE is accelerating too rapidly, to the point that at ANY GIVEN MINUTE of ANY GIVEN DAY the final death knell could sound, the commencement of the PANIC that CANNOT BE AVERTED by the stroke of a keyboard (i.e. printing electronic money).

Last Friday we entered the weekend with crashing stock markets (particularly BANKS, despite the best efforts of the PPT), surging gold prices (despite the typical, MASSIVE Cartel suppression tactics), and the prospect of an imminent Greek bond default.  The Bank of Japan had just announced its most blatant (and in hindsight FAILED) attempt to devalue the yen, and the Swiss National Bank had just announced the UNTHINKABLE, an all-out currency devaluation in plain sight of the entire financial world.

That night, the G7 meeting (England, France, Germany, Italy, Japan, Canada, and the U.S.) concluded with a brief, ambiguous communiqué.  I excerpted the key phrases below, which essentially said ‘WE WILL DO ANYTHING, LEGAL OR ILLEGAL, MORAL OR AMORAL, PRACTICAL OR IMPRACTICAL, SO SAVE THE STATUS QUO, IN WHICH WE, THE MOST WEALTHY, POWERFUL, CONNECTED A—HOLES ON EARTH RULE EVERYHING, STEAL EVERYTHING, AND DECIDE WHO LIVES AND DIES.’

Central Banks stand ready to provide liquidity to banks as required. We will take all necessary actions to ensure the resilience of banking systems and financial markets.

In other words:

‘CENTRAL BANKERS ARE ALL-POWERFUL GENIUSES WITH THE ABILITY TO MANIPULATE ANY AND ALL MARKETS INDEFINITELY SIMPLY BY PRINTING MONEY.  IT DOESN’T MATTER THAT NOTHING WE HAVE SAID OR DONE HAS EVER WORKED, THAT SEVERAL OF US ARE VISIBLY BANKRUPT, OR THAT INFIGHTING THREATENS TO DESTROY OUR TREASONOUS UNION AT ANY SECOND.  WE HAVE BEEN PRINTING DOLLARS, EUROS, YEN, POUNDS, AND FRANCS AT AN EXPONENTIAL RATE SINCE THE GLOBAL FINANCIAL CRISIS COMMENCED IN 2008, AND WILL CONTINUE TO DO SO, WITHOUT ANY PRETENSE IN THE SLIGHTEST, UNTIL THE MARKETS DO WHAT WE WANT.’

At that time, interest rates on Greek one-year debt had just passed 100%, while credit default swap spreads were, and still are, predicting a 98% chance of Greek default (tables below):

GREEK ONE-YEAR DEBT INTEREST RATE

GREEK CREDIT DEFAULT SWAPS (COST OF INSURING GREEK SOVEREIGN BONDS) – NOTICE IT CONTINUED TO RISE LAST WEEK!

But these banking geniuses, who cumulatively received $16 TRILLION OF OVERT AND COVERT BAILOUTS over the past three years from the Federal Reserve (ALL WITH FRESHLY-PRINTED DOLLARS), decided they could “save the day” once again if they just PRINT MORE MONEY, coupled of course with a MASSIVE, coordinated effort to SUPPORT BANK STOCKS and ATTACK GOLD AND SILVER PRICES.

> More from Source

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Here’s the initial market reaction in early Asian trading over the weekend’s development

Categories: News Tags: , , , , , , ,
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