SGM Metals: JP Morgan's $2 Billion Loss is a Fraction of the Total Derivative Loss!

May 21, 2012 - PRLog -- The Golden Truth reports: [ "We're getting to the heart of why you own gold" - long time friend and colleague, Wistar Holt (Holt & Shapard Capital Mgmt) The following is regarding the inconceivable $2 BILLION loss by none other than Jamie Dimon at JP Morgan.

First, Jamie Dimon did a superb job of throwing very expensive, opaque lipstick on the world's ugliest pig & catering the to the Wall Street analysts & media who take what he says & spin it to the public in the best possible light. In fact, I just saw one headline on Marketwatch that said "JPM stock is lower due to a a bad trade." A "bad trade?" This is not a "bad trade." This is a massive proprietary (i.e. bank trading/speculation portfolio) position that has blown up. Dimon fraudulently refers to it as "an economic hedge" that didn't work as well as they expected.

What we just saw last night was the result of Wall Street's equivalent of unsupervised special ed. children playing with financial nuclear triggers. How do I know this?  I used to be one of those unsupervised kids back in the 1990's, when the magnitude of the capital being played with was a small fraction of what it is now.

With regard to the idea that - as Jamie Dimon put it - this is a $2 billion dollar economic hedge that didn't work. Make no mistake about about it, the true size of this horror is easily several multiples of that reluctantly disclosed "error." This quote is from a good friend who has spent his career at four different Wall Street firms, including the pre-collapse Lehman - in other words, he knows quite a bit about what goes on behind the scenes in bank risk portfolios: "Saying this is less than ten times the disclosed amount is being generous."

What we know for sure is that there is a derivatives trader in London working for JPM who was running a trading/capital position that is thought to be as large as $200 billion. For JPM/Dimon to publicly claim that the embedded loss in this position is only 1% is complete fraud. To begin with, JPM's stated book value as of 12/31/11 is $183 billion. There is no way in hell that JPM would call a surprise conference call to disclose a loss from a bad hedge that amounts to less than 1% of shareholder equity. Even by today's absurdly loose accounting standards, anything less than a 5% event is not considered to be meaningful.

What this tells us is that JP Morgan's liquidity is potentially threatened by what is unfolding in its $78 trillion derivatives book (per recent OCC filings). Even worse, despite all the claims to the contrary, and Dimon's insistence of JPM's "fortress" balance sheet, the risk managers at JPM have no idea how to hedge $78 trillion in exposure and this myth about "net" vs. "notional" derivatives exposure is complete fraud.

Beyond all of this, we really don't know much. JP Morgan did a masterful public relations job at obscuring the facts & minimizing the data & details that would be meaningful to any analyst who is looking for the truth. But we should expect nothing but this kind of useless B.S. given that the Obama Government has made it clear that they are not going to do anything to implement supervision & law enforcement on the group of banks & individuals who have contributed & raised the most amount of money for Obama's 2008 and current election campaigns.]

Here we go again. The western banking system that put us into this global financial mess is now beginning to take major losses that threaten the stability of the western banking system & therefor the entirety of the banking system itself. The intricacies of the western banking system & their risk management is counter-intuitive to what we have been taught as individuals about how to balance a check book. Western banks operate with a fractional reserve model equal to you writing 9 checks to pay bills with the same $100 in your checking account. You would ask the creditor who you paid the bad check to, to simply hold the check as a $100 asset but not to cash it so you wont get hit with a bounced check fee and screw up your financial strategy as well as your credit score.

Now imagine that the holder of your check agrees to honor your request and not cash it but instead registers the $100 check as an asset on their balance sheet, as long as they can in turn do the same thing you just did with them. So they now use that ‘$100 asset’ to write 9 more checks to other institutions they owe money to & with the symbolic payment comes the request to not cash the check & simply count it as an asset on their books. This quickly becomes a spider web of ‘financial assets’ that are nothing more than smoke & mirrors. This works for as long as EVERYONE involved is willing to play their part & NOT CASH THE CHECK. As long as this is the case the perception that the banks are flush with cash seems very plausible because after all their balance sheets say they all have huge deposits sitting there not being used. The media cheers “US companies & banks are holding more cash than ever before in history on their balance sheets” & this is used to entice the average investor back into the markets. Its all a rouse & the average person hears this & jumps headlong into the market again thinking its go time, but the big boys never quite come out to play.

Now go back to Q/4 2008 & remember that this very situation played out in the US banking disaster as the credit bubble popped & the housing market began to tumble. Everything was OK as long as the banks kept their cool, but that quickly changed when one of the banks broke their promise & was forced to ‘cash the check’ as they panicked & needed liquidity to cover their growing losses. Now imagine what happens to balance sheets of the banks if for years this ‘bad check shuffle’ had worked so well that it was continued indefinitely & layer upon layer of financial instruments had been built upon it? When the base collateral asset is removed everything built on top of that collateral begins to fall as it is now unsupported. So begins the panic because nobody really has anyway of quantifying exactly how much damage can come from the cashing of the original measly $100 check because there is so much that relies on it being there indefinitely. Since the charade has continued for a couple decades there have been endless stock purchases, bond purchases, lending, financing, acquisitions, & endless mergers that have only been possible by the endless leveraging of these assets by the banks. Due to the colossal paradigm of financial instruments that too have been used as collateral it laid the groundwork for the modern disaster of endless derivatives in mortgage backed securities & therefor endless credit default swaps that at the start of the housing crisis was estimated at roughly $1.5 QUADRILLION and now is roughly $2 QUADRILLION.

The banks have propped up the stock market to keep the boomers calm so they wouldn't pull their investments out and cause more collateral damage, but what happens when they do? The interconnectedness of the global banking system that is complicated by this bad check scam can and will cause more surprise losses like JPM just announced. With this ever increasing losses coming down the road look for other banks to be collateralized by one banks surprise losses because they may need to ‘cash the check’ to cover their losses, then the other dominoes begin to fall. With this much uncertainty in the world can you afford not to establish your “Plan B” in physical gold & silver bullion? Now it is beginning to make sense why the FED & the US govt. were so willing to give the bankers endless bailouts, so nobody had to ‘cash the check’. The problem is that the trillions of bailout dollars now are bringing another economic variable to bear on the market & that is inflation. Remember in global currency wars such as we are helplessly locked into currently, inflation can turn into hyperinflation just the same as recessions can turn into depressions. Choose wisely.