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JP Morgan’s Stunning Announcement

05/11/2012

After the market closed yesterday, JP Morgan announced a huge trading loss, with estimates ranging from $2 billion to $4.2 billion.  While the Wall Street bank can certainly handle the loss, it is important to note the loss occurred in their “synthetic credit portfolio” (Read:  derivatives portfolio).

The derivatives market is a vast, thinly-regulated set of largely private contracts that worries me.  The market is so lightly regulated, nobody knows just how large it is, although it must be in trillions of dollars.  I have often said it is time to sell as soon as you hear of the first derivatives blow-up, i.e., the first time a counter-party to a derivatives contract reneges.

This is NOT such a situation!  While my trigger-finger got itchy last night to hit the SELL button, it is not the correct time for a panic sell.  JP Morgan can easily handle their obligations on these derivatives.

The more important result from this announcement by JP Morgan is that passage of the Volcker Rule now seems more likely; a rule that JP Morgan has fought bitterly.  Because some banks really are too big to fail, they have the ability to take huge losses, which the taxpayers will pay.  If they make huge profits instead, the banks keep all the money.  In other words, heads I win, tails you lose.  The profits are privatized, while the losses are socialized.  That is simply unfair to taxpayers!

Maybe, JP Morgan did America a big favor ??

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