JPMorgan: Counting Bailout Money as Profit

If you are worried about where your TARP or any other bailout money is going, this press release from JPMorgan (JPM) may provide a hint:

[Source]

The opening of the article leaves out one huge product segment of the Fixed Income Derivatives product group, Credit Default Swaps (CDS). In fact this is a huge oversight, the OCC source shows that banks have an 87 trillion OTC derivative exposure which includes fixed income derivatives and states that of the 16.1 trillion of outstanding credit derivatives, 99% are CDS. Why did Bloomberg not come out and be forthright about 20% of the derivatives market?

Moreover, over 40% of reported trading revenues derived from this segment of the derivatives market.

click to enlarge

With AIG posting $60 billion in losses in the last quarter, there had to be someone on the other side of those trades who would claim a commensurate gain. As of Q3 of 2008, according to the Office of the Controller of the Currency (OCC), there are only 5 major CDS brokers amongst the US banks who hold 87% of the outstanding notional credit exposure. JPMorgan is one of those five. Thus when the government provided $60 billion capital to AIG in order to meet collateral requirements for its counterparty positions, one can infer that the ultimate recipient was JPMorgan, and other major CDS dealers.

This is the fallacy of the whole market. The government is providing AIG with funds not just to keep AIG afloat but to support all of AIG’s counterparties from the systemic risk of not getting paid. But in providing this liquidity, the government is allowing JPMorgan to mark profits from bailout money originating at another firm and while they hold on to the TARP money they received from the government.

What is to be learned from this? The systemic risk of the “Shadow Banking System” is being balanced by the US taxpayer. But what is not being communicated is how many counterparties are also being saved by the single bailout of AIG and other major lenders. What's astounding is that the market makers continue to perform solid business in the very instruments that could at any moment cause their demise if the government withdrew its support for the losing counterparties. This evidence underscores how dysfunctional the whole banking system currently is and how much more needs to be done to wean the banks with the most CDS exposure from government funded settlements.

Comments

[Marshal:]

Ironically 140 years ago!!
“Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized and the State will have to take the road which will eventually lead to Communism.” - Karl Marx, Das Kapital 1867

Shall Obama administration let the history be predictable?

Mar 05 10:21 AM

[Jeff Noel A...:]

great catch... accountability is forbidden word to divulge.. nay, to type or even utter in any other terms. profit is a PR stunt for them.

Mar 05 10:22 AM

[the_watcher:]

>>Ironically 140 years ago!!
“Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized and the State will have to take the road which will eventually lead to Communism.” - Karl Marx, Das Kapital 1867
----------------------...
That's not a real quote. It's been going around the net for some time. Das kapital does not contain any such quote.

business.timesonline.c...

Read last paragraph.

Mar 05 12:59 PM

[me1980:]

STOP!!! Give the man a chance

Mar 05 01:25 PM

[me1980:]

He's only been in office for almost 2 months. Hes trying to make change and help the poor. Its better than creating war and 5.00 a gallon gas prices. We could end up a third world country. He trying to put the United States back together again!!!! Geez he;s only one man trying to fix the country that Bush RIPPED apart? He did more in less than 2 months than some would. He truly cares....which is more than I could say for you. Keep your quotes to yourself, and if you are going to quote Marx, get it correct!

Mar 05 01:28 PM

[IAMNEXIALIST:]

Interesting! It seems the rich are protected no matter which party is in power!

Mar 05 02:57 PM

[Dhimant:]

Excellent Point !!!.......
JPM is bank with large number of outstanding derivatives contract.
How can bank which is no 1 player in Derivatives market is posting profit when others are crying.
Please find the details on derivatives of precious metals.. No of outstanding short position in precious metals (silver) in March 2008 jumped to record point by JPMC and then silver retreated from 20 to 9 dollars....Something is fishy

Mar 05 04:48 PM

[User 214545:]

JPM, like other banks, is investor owned. A lot of us have small holdings of a number of these banks in our 401(k)s, mutual funds, etc. As long as the game is fair (and fair is defined by government regulations, or lack thereof), it should be and can be played. In fact, JPM is one of the best run banks in the US. Jamie Dimon was cutting costs way before any crisis touched the US - ask any JPM employee. Please do not support socialism. Let fair capitalism survive !

Mar 05 06:44 PM

[Lockstep In...:]

Apparently Congress has the same concerns that I have...

www.nytimes.com/2009/0...

"Tens of billions of those dollars have merely passed through A.I.G. to its derivatives trading partners, shielding them from losses. The Fed has refused to provide the names of those financial institutions, and senator after senator, Democrat and Republican, said that was an outrage."

I wonder what these congressmen would say if they found out it was the company they lauded so much as the "prudent navigator". Horsepucky to that!!!

Mar 06 12:56 PM

[PainfullyAware:]

On Mar 05 01:28 PM me1980 wrote:

> He's only been in office for almost 2 months. Hes trying to make
> change and help the poor. Its better than creating war and 5.00
> a gallon gas prices. We could end up a third world country. He
> trying to put the United States back together again!!!! Geez he;s
> only one man trying to fix the country that Bush RIPPED apart? He
> did more in less than 2 months than some would. He truly cares....which
> is more than I could say for you. Keep your quotes to yourself,
> and if you are going to quote Marx, get it correct!

You wrongly believe that there is a two party system that cares about the people they govern. Results and action should be the only measure. They are the same - The Money Party. You may wish to read some of the legislation that has passed recently and look specifically in how the oversight is structured. You will find that the allocation powers for funds are the same group that has been given oversight. Reports are to be given to congress; but they have no power to influence.

I do not care what label you put on a person; I care what the outcome of policy is, in longer term than the immediate.

Those that put faith in words and discount action are easily deluded.

Those that give up liberty for safety deserve neither.

Peace at all costs is not peace.

Mar 06 01:06 PM