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: