Wednesday, May 16, 2012

Too big fail

Too big fail

by Ted Rudow III, MA ( Tedr77 [at] )

Wednesday May 16th, 2012 

JPMorgan’s latest woes stem from the flaws endemic to "too big fail." "Allowing [banks] to be this big, even conservative economists call this crony capitalism-

the only way this can work is to shrink the systemically dangerous institutions — this is the 20 largest banks in the United States — down to the point that they no longer pose a systemic risk, they are no longer too big to fail, and therefore, they will no longer have this implicit federal subsidy that completely distorts competition". William Black

They had about $15 billion in distressed European debt. Europe has been in just a ton of trouble. A hedge is something where you invest in a second asset that is supposed to offset losses that you suffer in the first asset. In this case, the first asset was that distressed European debt, and the second asset, the supposed hedge, was a derivative of a derivative. In this case, it was an index of credit default swaps, which are a form of derivative that blew up AIG.

JPMorgan is nobody was looking very carefully at the supposed hedge, and the hedge didn’t perform to offset losses, instead it increased the losses and increased the losses dramatically. And supposedly, no one was looking, and no one adjusted for this. And they woke up, and they had a $2 billion loss. So this is hedginess: not really a hedge, but you call it a hedge to evade the law. This also destroys democracy, because these giant institutions have so much political power.

Ted Rudow III, MA

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