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May 11, 2012 By Steven Greer, MD
The news today of JP Morgan losing at least $2 Billion from a few people on a trading desk loading up on synthetic derivatives could trigger another global collapse, ala 2008. The European Union and the Euro are on life support, Spain and Italy seem ready to default on sovereign debt just as Greece has done, and the “Too Big to Fail” banks such as Bank of America and Citigroup are still carrying bad debt on the balances sheets that was never cleaned up after TARP. To make matters worse, the traders at JP Morgan were dealing in complex credit derivatives similar to the infamous CDO’s of 2008.
According to the Wall Street Journal, “The losses stemmed from wagers gone wrong in the bank’s Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed “the London whale” had roiled a sector of the debt markets…The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred while J.P. Morgan tried to scale back that trade…The bank’s strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Mr. Dimon said Thursday in a hastily arranged conference call with analysts and investors after the stock-market close. He called the mistake “egregious, self-inflicted,” and said: “We will admit it, we will fix it and move on,” he said.”
In December, Bank of America (BAC) was trading below $5 when rumors were flying that the balance sheet was worse off than the company was letting on. Citigroup (C) was so bad off in 2008-09 that President Obama ordered Treasury Secretary Tim Geithner to break it apart into a “Good bank” and “Bad bank”, but Mr. Geithner essentially ignored those orders (according to author Ron Suskind). The stock markets have made artificial gains on low volume trading only because of the Federal Reserve’s Quantitative Easing programs, like heroin to a junkie. Unemployment remains sky high and housing is still at rock bottom. Finally, almost nothing has been done to reform Wall Street. Very little of Dodd-Frank has been enacted. All of this makes for a dry tinderbox situation in the global markets.
The JP Morgan crisis will likely get worse over time, as the CEO said on the call today. $2 Billion is the tip of the iceberg. It could very well trigger a market collapse like 2008 all over again. If the once thought rock solid JP Morgan is in that much trouble, then what is behind the curtains at the other more struggling American and European banks?