Wednesday, July 4, 2012

$3 billion? $9 billion? What next?

JPMorgan-Chase first announced a "relatively small" derivatives trading loss of, maybe, $3billion. Maybe. Now it looks like it may be around $9 billion. Yet, goes the conventional wisdom, this is small for a bank with around $75 trillion in "notional" value. (Notional value is the value of "leveraged" investments, which is much more than the actual or "owned" asset value -- click here for a useful discussion.) 

But conventional wisdom -- where the convention is what Wall Street would like us to believe -- is not always wisdom. This was quite sharply illustrated after the Great Collapse of 2008, when Alan Greenspan admitted that his conventional "wisdom" was in error. (Of course, he was one of many conventional Wall Street apologists who were dead wrong.)

For an interesting analysis of the threat of massive derivatives trading by banks, see this article by James M. Stone, former chair of the Commodity Futures Trading Commission, and commissioner of insurance in Massachusetts.

No comments:

Post a Comment