The market seems to have completely forgotten the fact that JPM’s massive CIO positions have yet to be closed.  Unfortunately for Mr. Dimon, at least $90 billion in potential losses remain, and the strategy of slowing unwinding the positions will blow up in The Morgue’s face and exponentially exacerbate JPM’s losses with any further downturn in the economy.

The JP Morgan (JPM) trading blunder could result in a $100 billion loss, a contagion of its massive portfolio, and even the wipeout of its entire asset base. Even worse, these extremely risky and potentially-illegal actions on behalf of the CIO office and the “London Whale” could be the unexpected “shock” that breaks the market, derails the Fed’s huge monetary stimulus, and sends us back into a global recession.

There is one event that may ultimately solve the mystery of the global economy. This event would not only plunge the economy back into a deep recession and lose investors hundreds of billions of dollars, but it could bring about the collapse of some of the world’s largest financial institutions and even render central bank stimulus and QE completely ineffective and futile. This event is by no means a guarantee; its probability is even likely under 5 percent. But this event has all the necessary ingredients to culminate into a major panic. Together with slowing global economies and an extremely unstable financial system, this could be the next Lehman Brothers.

This event is JP Morgan’s huge trading mistake. The massive losses that were racked up starting in April and May 2012 are by no means over. What has been represented by JP Morgan as a trading mistake and “hedging” strategy with an initial estimated loss of $2 billion, was really a leveraged and speculative bet that could soon infect JP Morgan’s entire portfolio and result in losses of $100 billion.

Apparently JPM’s ‘hedge’ included selling CDS protection from 2013-2017, meaning that JPM is in a heap of trouble should any significant downturn occur in the economy over the next 4 years (From Seeking Alpha):

Trade #1 was a smart hedge betting against the global economy, by having bearish positions on junk bonds (JNK) – one of the riskiest asset classes most sensitive to the condition of the economy. This position was a very good hedge because JP Morgan needs to protect itself from a potential economic downturn. If the economy deteriorated and stocks fell, JP Morgan would at least make up some losses by profiting from these bearish bets.

Trade #2 is where the real trouble stems from. Instead of hedging through bearish positions, Trade #2 actually bets on continued economic strength. Trade #2 was a bet that investment-grade bonds will not default – that strong corporations will continue to be financially stable and be able to pay off all of their obligations. JP Morgan’s bet was that credit markets would strengthen. To make matters even worse, Trade #2 was based on the position that 2012 should be protected but that 2013-2017 would be safe (buying CDS protection for 2012, selling CDS protection out to 2017). In other words, JP Morgan was now betting that investment grade bonds would not default from 2013 to 2017. Moreover, Trade #2 was much bigger than Trade #1.

Not only is JPM attempting to hide the true extent of it’s losses by sneaking the losses into prior quarters’ numbers and valuing the illiquid derivatives to fantasy, but the regulators investigating the trades are using JPM’s own internal models to quantify the losses!

Regulators such as the OCC and SEC have attempted to find out exactly what has happened and how much risk is still out there, but they have likely been looking at “the same models that the bank itself was using (WSJ, ibid.).” It seems that the regulators themselves still have a lot to find out, and the $9 billion max-loss estimated by JP Morgan itself is not likely accurate.

Finally, while Mr. Dimon insists that only $10 billion is at risk, Bloomberg has reported that the total value of the CIO office’s speculative portfolio was approximately $350 billion!

While Jamie Dimon insists that Iksil (The London Whale) made a risky $10 billion bet in an illiquid debt index, and that this is an “isolated incident,” there may be much more at risk than the measly $10 billion.

In fact, the CIO’s job was to “invest the difference between the $1.1 trillion in deposits the bank has on hand from its customers and the $750 billion the bank has lent out to corporate borrowers (Bloomberg, Exactly Whose Money Did The London Whale Lose?).” That leaves $350 billion that was under the direction of CIO Ina Drew, who has since been forced to resign. Dimon claims that the bad trade was limited to the $10 billion bet by the London Whale, but a number of factors point to this mess potentially affecting way more than just $10 billion.

First, we’ve already heard that JP Morgan’s position in risky, illiquid debt derivatives has had a face value of $100 billion; Iksil’s position may have been $10 billion, but somehow JP Morgan attained a $100 billion risk exposure. Second, even if just a $10 billion position was taken, if it is highly-leveraged it could wipe out much of the value of JP Morgan’s other assets.

With JPM set to self implode with any significant downturn in the economy over the next 4 years, is it any wonder that the Fed surprised many with QE∞ 2 weeks ago, and is already discussing ADDITIONAL EASING!?!

As WilliamBanzai7 demonstrated so clearly:

  1. There is no way the monsterous thugs even care if JPM has any money or not. They simply print more of the worthless stuff and it is business as usual. These guys do not care that they are destroying the world. That is their plan. When ALL economies have been destroyed there is a plan to stop our pain if we will only listen to them, once again, with a new scheme. This time the scheme will be a global scheme and will make it extremely hard on those who talk bad about government. It appears that all governments are in colusion and that they are all playing their parts in this giant theatrical that is playing before our very eyes.

    • If all of the governments of the world are acting in concert on this it will be for the FIRST time in human history that they have done so.

  2. Now we know why MS and JPM are whining that QE 3 is NOT ENOUGH.  QE 4 will purchase the entire book of CIO bad paper and offer unlimited credit facilities for all CDS and Derivative defaults.  Why not?  It’s only money!

    • But that’s just it, AG.  Bernanke KNOWS that it is NOT money.  It is only paper with ink on it and he can order up any amount of that he wants.

  3. JPM, GS, and BOA are all fronts for the Fed/Treasury CABAL.  They are not going down until the whole edifice goes.  They can perform any malfeasance they want in the meantime, because they have all the financial and political cover the US government can muster.

    • You are so right! When that time finally comes, and that could be very soon, the whole planet will fall into a deep hole with no other alternative but to slam onto the floor at the bottom of that hole. Only then will we be able to move forward, unless of course all our bones are broken from the fall.
      It will be a very slow recovery……..

    • I don’t know why they wouldn’t, Mary.  Texas and Alaska seem prime candidates for that, although the closeness of Russia to Alaska might give them pause.

    • @MaryB Utah might become an independent country and its economy will survive after the USA collapse because people can buy stuffs with gold and silver. After the collapse, there will be a few states that will join with Utah while the other states might belong to USA’s surroundings such as Canada, Mexico, Russia, China, Japan and the European Union if it still survives in the future.

  4. If the Fed / banks / treasury cabal manages to completely destroy the US, European, and Japanese economies, the entire world WILL stagger into a complete collapse.  My question is, “How will these clowns escape the ravening hoards who want to string them up when their private jet pilots realize that their families are not going too?”.

  5. I firmly believe that a collapse will be the best thing, like Bix’s 
    CREATIVE DESTRUCTION EVENT as it’s called. As for the rest
    of the RTR theory, not quite so sure. But having the renewed
    CONSTITUTIONAL US Govt. pay out our SSI benefits in GOLD
    would be AWESOME! The estimate in the story called for 20oz
    of Gold per person, rather Bix guessed that. But wouldn’t each
    person’s payout be different? Based on payments IN?
    That was presumably an average.

    I’d like to see JPMorgue and J. DEMON GO DOWN!
    Poetic Justice served cold…

  6. If JPM’s CIO book is that large, $100 billion or more, the unwinding of that investment might be a pivotal event that throws a ‘kill switch’ on  one or more other large banks.  These banks are tied at the hip and shoulder by interbank relationships that are at this time little more than mutual support structures. JPM will first go after their associate banks to extract all the capital they can muster to fill that monsterous hole before they accept the loss of their entire capital base. They will sell assets as fire sale prices thus cratering the value of the same type of collateral held by their fellow bankers. Hence the siphoning of MFG was a means to stave off financial harm when JPM itself had collateral calls that required the liquidation event of that small satellite firm last year. JPM learned that lesson well. Kill with impunity, gut the little guy and no one gets punished. I expect that will be the strategy again. Peregrine was another snack too, just like MF Global.
    Willie talk about the banking enterprise being a tower of babel with low narrow weak support beams. He also refers to MS being the weakest of the group. They may have staved off a failure since they just got that bargain basement deal from Citibank that turned over the control of that shared brokerage with $45 billion in funds. The rule was ‘hands off’ until 2015 but what’s to stop MS from dipping into those accounts with rehypo or outright theft.  So JPM losses could pass through to one or more mega banks starting a cascade effect.  Only those with a vast pool of liquidity would be able to survive. I suspect that the cries for QE 4 are going to get louder by the week. $40 billion a month shared amongst this group of weakened giants is too little and too slow. It will not suffice to stay the liquidity drain presently imposed by market conditions, major declines in income, trading losses and client flight.
    I won’t speculate why we are seeing so many successful hacks creating denial of service to WFB, PNC, US Bank and B of A.  These seem to be just one of many tectonic shifts destablizing the financial eenterprises across the globe. Any one of them might not have sufficient force to collapse a bank, but if one was on the edge and could be tipped with enough of a destructive effort, B of A comes to mind, these various forces could be the black hole event horizon for someone we know.
    JPM has  no friends; only sharks and other predators ripping at it’s flanks. Legal actions abound draining billions in fees a year. MS’s top rank people are pulling golden parachutes, taking their book of business to other firms, local or international. The Chinese banks are not safe what with the rumor that a city of 10 million verges on bankruptcy. What effect that would have on our banks in unknown
    On a side note Fidelity Investments has been so gutted of their retail accounts that at this time well over half of its asset and investment base is now in bonds and money markets, neither of which are money makes.  All they do is strip clients incomes off the top and leave the scraps for the account holders. That is a telling sign of epic client relationship failure. 

    It is very doubtful that Greece can survive this year. Their $450 billion in bonds are due for a visit to the boneyard of failed regimes who repudiate their debt. A haircut will not accurately describe the bond defaults this time. The amount owed coupled with the CDS trailers will split the US banks who have to make good on the swaps. That could easily be another $100 billion. The apple cart is wheeling down the road.
    A suggestion for a business. Build good carts and wheel barrows. People will need them to carry their dollars to the grocery store.

    • If JPM’s CIO book is that large, $100 billion or more,

      At spring the news said that Iksil was able to make bets worth hundreds of billions with money leveraged out of nothing.

    • AGiie, I usually agree with you but THIS:
      ” A suggestion for a business. Build good carts and wheel barrows. People will need them to carry their dollars to the grocery store.”

      I beg to differ, a company needs a high capacity Debit Card  😀
      They are using this coming crisis to push digital dollars, mark my word!

       You were prolly just being figurative anyway LOL!

  7. undeRGRound  Now that is funny!  Wireless Wheelbarrows for Digital Dollars 
    Love it. 
    Roll your faux-tronic money into the www  grocery store and buy virtual food.  A Zen diet in the New Age World

  8. Let JP Morgan collapse and the gold and silver’s manipulations will end. Even if QE infinity was announced by the media, most of the sheeple don’t know what it is and the majority of them are too lazy to do researches about it. By the way, that robot Bernanke is really creepy with his big and shiny eyes and his smile. o_o

Leave a Reply