Digging Deeper: Banking Should Be Boring

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What happened? How did JPMorganChase lose at least $2 billion and nobody knew?

With the sensational size of the loss involved, this is one time when it’s important to understand the technical steps that led to the debacle. It’s not the size of the loss, or whether risk is inherent, or Dimon’s reputation. but whether the risk could have been foreseen–the policy question ignored in every news report.

This loss came with a “Will Robinson” danger sign (a reference to the ’60s television show, Lost In Space). First the market for the derivatives was small (despite the size of the loss!) involving a limited number of trading firms. This limited trading range produces an illiquid market, a market where it’s difficult to make trades because there are too few buyers and sellers. In JPMorganChase’s case, the company was actually phoning other companies to make sales of their products. So the market also wasn’t blind; most traders easily figured out JPMC were the originators of the market and market makers. The product was a credit default swap. It requires payment or liquidation when the market reaches certain points.

Secondly, JPMorganChase was on one side of the market, acting as seller for instruments it created. JPMC made a one-way bet. The firm was completely exposed to changes in the market and had nowhere to hide. Continue reading Digging Deeper: Banking Should Be Boring

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US Snubs Possible Al Qaeda 'Olive Branch'

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In recent weeks, officials from the FBI/NYPD Joint Terrorism Task Force have briefed security officials of top Wall Street firms about the existence of a Yemen-based Al Qaeda plot to attack major banks and investment houses — possibly targeting individual high-ranking executives of Goldman Sachs, Citibank, JPMorgan Chase, and Barclays, among others.

The move follows months of infighting among national security officials since the initial discovery of the planned attacks.  While some experts see the plot as an attempt to further disrupt US and world financial markets, many see it as a gesture intended to be a first step toward a dialogue and perhaps reconciliation with the West.

“Clearly, it is not unreasonable to interpret this as a ‘peace offering’ aimed at what little is left of the American middle class,” according to Newton Toomey, professor of 21st Century Financial Terrorism at Pueblo State University.  “It may very well be their way of saying to the average taxpayer and/or homeowner, ‘we understand and we’re with you’ — after all, who better to understand the prospect of living in caves while ducking bill collectors?”

House Speaker John Boehner, speaking on condition of anonymity after being briefed on the situation by Homeland Security Secretary Janet Napolitano late last night, applauded the decision to “err on the side of caution and presume the worst possible motives” in responding to any threat.  “While I could never say this on the record, I applaud the courage shown by the Administration in their handling of this situation.  In the wake of the financial meltdown, the subsequent taxpayer-funded Wall Street bailout and the millions of resulting foreclosures, it would have been easy to do the ‘popular thing’ and allow events to unfold in due course without interference,” the visibly concerned Boehner told an Al Jazeera reporter posing as a tanning booth technician, adding, “With the Republican Party facing its most crucial election in decades, I am personally elated that Wall Street executives will be kept safe.  I only hope the same can be said about our other big donors.” Continue reading US Snubs Possible Al Qaeda ‘Olive Branch’

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