Why JP Morgan is Playing the Same Old Rigged Game

There’s a direct connection, Dear Reader, between the trading losses at JP Morgan and the conspicuous non-prosecution of Jon Corzine. In fact, there’s a term for this connection. It’s called “moral hazard.”

Most parents understand the term. They understand that the best way to raise a socially dysfunctional brat is to give him a candy bar every time he whines for something, and to give him a $20 bill every time he bullies a classmate. And yet, incredibly, the Federal Reserve, Treasury and Congress are doing exactly that. They are creating a generation of “spoiled brat” bankers.

Just three years after the depths of the 2008-9 Credit Crisis, Wall Street’s power brokers remain as remorseless as ever, as self-entitled as ever and, therefore, as fearless as ever. That’s not a good thing.

Three years after a crisis that nearly toppled the US financial sector, JP Morgan is playing the same old games…as if nothing had changed. The official chitchat from Washington and Wall Street about “risk” and “regulation” has changed quite a bit since 2008, but Wall Street’s behaviour is just as deplorable and dangerous as ever.

Financial Tar Pits

As the chart above shows, the “gross market value” and “gross credit exposure” of global OTC interest rate derivatives has jumped to its highest levels since 2008. If you don’t understand what these data points mean, don’t feel bad, Jamie Dimon doesn’t seem to get it either. (But if you’d like to understand what these data points mean, check out this report from the Bank for International Settlements).

The only thing you really need to know about the global derivatives market is that risk exposures are increasing, not decreasing. JP Morgan’s balance sheet tells the tale. According to Morgan’s latest quarterly report, the firm was a net seller of credit protection — to the tune of about $206 billion, up from $116 billion as of Dec. 31. In other words, it nearly doubled its risk exposure. JP Morgan calls this speculation “hedging.” Unfortunately, it is hedging without a hedge, which is the same thing as speculating.

The newly “retired” Chief Investment Officer of JP Morgan, Ina Drew, was supposed to be hedging other exposures at the firm. But hedging is not supposed to produce billion-dollar losses. That’s why it’s called “hedging.”

“[Ina Drew’s] position over the years has always been around hedging,” explains Dina Dublon, a former JPMorgan CFO who worked with Drew for 22 years, “but hedging for profit as opposed to hedging just to counter losses.”

Ah yes…“hedging for profit”…also known as “speculating.”

“The sheer size of this trade,” says Barry Ritholtz, editor of the Big Picture and recurring speaker at the annual Agora Financial Investment Symposium in Vancouver, “makes it far more accurate to describe this as speculation than hedging. The loss was the tell. A true hedge would have been offset by the underlying position that was being hedged — so any loss should have been insignificant. Even a minor correlation error should not lead to a $2 billion hit.

“If we are going to define this trade as a hedge, then there is no other conclusion to reach except that everything at a huge bank is a hedge. And once you define everything as a hedge, well then, nothing is a hedge.”

In other words, Dear Reader, nothing has changed since 2008. Absolutely nothing. The only reason Dimon is around to lose $2 billion of the shareholder’s capital in 2012 is because the federal government (i.e., we taxpayers) bailed him out in 2008.

Therefore, Dimon understands the rules of this rigged game very well. He knows he can conduct mega-billion-dollar speculations because he knows that JP Morgan could never bankrupt itself, no matter how recklessly it conducts its business.

The US central planners would not allow it. Morgan could build bonfires with $100 bills in front of all its branches every night, and it still would not be able to burn through the federal government’s commitment to keeping it alive.

Jamie Dimon, along with the rest of the coddled Wall Street predators, knows he is just as free to jeopardize the US financial system as he was in 2008. He and his counterparts at Goldman and elsewhere are just as free to place their monstrous heads-I-win-tails-you-lose bets with non-consenting US taxpayers as they were in 2008. No one will stop them.

Vibrant economies and civilized societies rely on law and order. And law and order relies on a foundation of fairness — a basic understanding that bad things are bad and good things are good. But when the powers of government begin to affirm that bad things are okay and good things are irrelevant, all hell breaks loose.

If America is to regain her former glory, she must first regain the integrity to prosecute criminality, no matter how many politicians know the criminals on a first-name basis…and she must regain the courage to let incompetent capitalists fail so that competent capitalists can arise to take their place.

If America is to regain her former glory, she must regain the integrity to prosecute guys like Jon Corzine and the courage to let guys like Jamie Dimon fail.


Eric Fry

for Markets and Money


From the Archives…


Is the Australian Economy… Booming…or Busting?

2012-05-11 – Greg Canavan

 The Art of Value Investing: How to Value a Business, Not a Stock

2012-05-10 – Greg Canavan

When Financial Markets Decouple From Reality
2012-05-09 – Dan Denning

Low Interest Rates Are A Dangerous Addiction!

2012-05-08 – Satyajit Das

The Bear Hunters and the Trigger Event for the Aussie Dollar

2012-05-07 – Dan Denning

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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3 Comments on "Why JP Morgan is Playing the Same Old Rigged Game"

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Another good article! But the ordinary “sheeple” will still continue to be concerned by the people with dark skin at their workplaces, or the football, rather than caring about these enormously weighty issues.

More is now generally known about JPM, GS and Corzine. People are starting to realise that their money is likely to be stolen without recourse, by protected interests and are abandoning some markets and taking more control over their finances. Some are actually moving their superannuation savings away from the crooks living on trailing commissions at client expense, before they lose it. I have an SMSF and my wife and I do our own trading and I’m even thinking of paying the taxes and taking the money out of that tax sheltered environment before gov’ts find a way to give… Read more »
$2bn has become $5bn within days, no surprise there; but the vampires yet to be materially restrained is another matter. Bernanke will be ready to go long JPM but doing a Greenspan put on smoke collateral positions might be another matter (an all bets off law is more likely). When will Obumma start using drones to pop off traders that are “discovering” the market against JPM? That would be the State Dept’s mercantilist-corporatist end game plan isn’t it? That now patented game of novelly rewriting commercial law, then claiming universal jurisdiction, and jailing/fining the foreign corporate opposition billions has got… Read more »
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