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CNBC- JPM Risk Hits Mainstream Media

  1. 1,256 Posts.
    Along with fellow GATA supporters and Gold Bugs in general, the truth is slowly but surely emerging about the true position of the worlds 4th largest bank.
    The below article was plucked from the CNBS website. Although its not directly pointing to a bank crash they are at least acknowledging the possibility.

    What is failed to be mentioned in this article is the huge loss that is imminently upon US banks due to a BRAZILIAN loan default. The possibility of Brazil imploding is real and will bear huge weight on the US and world banking situation. Brazil will be played out in the next few weeks and will only add more weight to the current financial system woes of the US. The stockmarket will follow suit.

    Jubak's Journal

    Why J.P. Morgan Chase has the market panicked

    The complex instruments known as derivatives are meant to hedge risk. But they may raise the odds of a collapse at the storied bank -- and, say many, for the market as a whole.
    By Jim Jubak

    Could a failure at J.P. Morgan Chase (JPM, news, msgs)
    crash the entire financial system? That's a scenario with credibility on Wall Street, which helps explain the recent trouncing of financial stocks.

    If you own stocks, you probably don't even want to consider this question. Who wants to hear about the chance that complex financial instruments -- derivatives -- could cause an implosion that could send the stock market reeling? After the pain of the last 30 months, who wants to hear about the possibility that the worst isn't over?

    And yet, I think you should read what follows to understand the potential risk. I'm not here to scare anyone to death.
    I think the odds of a worst-case, derivative-market
    implosion are low -- and the odds are against even the
    collapse of a single major power in the current derivative market in a way that does lasting damage to that market.

    But the problem is that no one -- not me or any other
    market commentator, not the bulls or the bears, and not even the people on Wall Street who invented these financial tools -- can tell you what those odds are. Because with stock prices so low and corporate balance sheets so leveraged and damaged, we're in territory that the people who packaged these derivatives didn't consider as possibilities when they ran their tests to see how their strategies would behave. It's exactly at this point in a major market decline when unintended consequences are most likely to pop up. (For an example of unintended consequences set off by the market decline, see my last column, "More surprises...the bad kind," on how the chief executives and chief financial officers at Electronic Data Systems (EDS, news, msgs), Dell Computer (DELL, news, msgs) and Eli Lilly (LLY, news, msgs) now find themselves having to pay out hundreds of millions of dollars as a result of strategies designed to save money on stock buybacks.)

    You need to understand this potential risk because the
    stock market is taking it seriously. The financial sector is under such heavy downward pressure lately because some investors feel there's another very big problem out there.
    And the most commonly mentioned problem is derivatives.

    What is a derivative?

    So what are derivatives and why are they so important
    to the current stock market?

    Derivatives are financial instruments that derive their
    value -- hence the name -- from the value of another security. An option to buy or sell a stock, for example, is a derivative because its value is based on the value of the underlying stock. The value of the option rises and falls because of changes in the value of the stock. An option to sell Cisco Systems (CSCO, news, msgs) at $15 a share becomes more valuable, for example, as the price of a share of Cisco sinks further and further below $15.

    Stock options are a relatively straightforward example
    of a derivative, but what unites options and all other
    forms of derivatives is that they're designed to enable
    buyers of other assets -- such as stocks and bonds -- to retain ownership of those assets while passing off part of the risk of owning that asset to someone else.

    To go back to my Cisco example, the owner of Cisco shares at $15 may hold those shares because of a belief that the stock is headed to $20. But the owner may still be worried that Cisco might be headed to $10. One way to hold onto those Cisco shares and yet pass along some of the risk would be to buy an option to sell Cisco shares at, say $13. The owner would still be exposed to a potential loss of $2 a share but not to any greater loss. If the stock did fall to $10, its owner still could sell at $13.

    No one takes on some else's risk for free, of course,
    so the buyer of that risk gets paid something for taking
    on that risk. Exactly how much depends on factors such as the volatility of prices for the underlying stock or bond and the sentiment of the mass of investors. When everybody is trying to lay off risk, the few investors willing to buy that risk ask for a higher price to do so.

    More fuel added to the Greatest CRASH of all time fire

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