Rhodomontade

A Bet Against the Banks

globalmacro, your case sounds persuasive but your analogy between equities in the stock market and credit default swaps is problematic because they are radically different things.

I see your point that if Morgan's swaps are properly balanced, they are hedged and the risk is minimized. But it's not that they bet the wrong way that's the danger.

The danger is a cascade of defaults, beginning say with the monoline insurers, or some other weak sister, spiraling out of control in a total derivative meltdown. Swaps from default parties are basically worthless, and does JP Morgan even know who all their counterparties are anymore? My understanding is these things can be sold at any time without notifying the other party to a third party. And so on.

Look at how much AIG had to write down out of their mere 78 billion in CDS. What if JP Morgan has to write down a similar proportion of their exponentially larger portfolio?

I'm no expert in these esoteric instruments, but even the possibility of such a catastrophe has me avoiding all financial equities at all costs.