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Jamie Dimon Welcomes You to the Next Financial Crisis

President and CEO of JPMorgan Chase Jamie Dimon testifies before the Senate Banking Committee on Capitol Hill June 13, 2012 in Washington, DC.

There was a great irony in JP Morgan Chase Jamie Dimon's love-in of a hearing in front of the Senate this week.

While lawmakers were ostensibly asking Dimon how to prevent the next, distant financial crisis, he was openly telling them that JP Morgan had predicted, to the tune of $100 billion, that we're hurtling towards one this year. 

In his least-challenged, least-questioned statement, Dimon explained the intent and strategy of JP Morgan's "London Whale" trade - a complicated $100 billion bet that, so far, may have led to a $2 billion loss and $39 billion in lost market value for the bank. The enormous bet, Dimon explained, was designed "to make money for JP Morgan in a global credit crisis."

Let's stop and think about that: JP Morgan started the London Whale trade in late 2011 or early 2012. That's when the bank must have seen a global credit crisis coming. Dimon said in his testimony this week that JP Morgan, with $700 billion in loans, needed to "protect itself" against "a systemic event." The bank was so positive that this systemic event would occur that it was planning to make money on it.

It's not as if JP Morgan was "hedging" here - there's no question that JP Morgan was inordinately confident that the London Whale was onto something, that a global credit crisis is coming.

When Dimon called the press coverage in April "a tempest in a teapot," it was because at JP Morgan, "almost everyone up and down the line thought it was temporary, it was a small thing, it was blown way out of proportion." To the extent that JP Morgan and Dimon have taken any blame, they have faulted their "model" that accounted for their risk, and not the strategy of the trade itself. Jamie Dimon earlier said that the bank has every intention of hanging with the bet - albeit with reduced risk. In fact, there appears to be a time limit on the bet: the corporate-bond index that JP Morgan bet on expires around December 15 of this year.  JP Morgan has to collect its losses or its profits before then.

Translation: the bank's stubborn backing of this bet means it believes losses are temporary; the profits will last. 

In another clue, JP Morgan made its gamble by betting on corporate bonds - which means the bank must have believed that this credit crisis would not just affect the obvious suspects - Spain, Greece, and Europe - but also large corporations. (In fact, JP Morgan's bet had a good opportunity to distort the market for corporate debt -- not just through its own actions, but also because its giant bet made the bank a giant target and spurred hedge funds to jump into the market and buy the underlying corporate bonds to bet against JP Morgan. That was an easy consequence to foresee with a big trade and, if the circumstances were right in the financial markets, could have caused a panic on its own, as I discussed with Lauren Lyster at Capital Account on Wednesday.)

JP Morgan is also stubbornly clinging to the bet. Bruno Michel Iksil, the trader who was dubbed the London Whale, is still at the bank, temporarily, but there's no indication that JP Morgan is unwinding the trade. On the contrary, Dimon has publicly said in the firm's conference call that he's willing - and expects - to keep bearing the losses.

In short, JP Morgan heard 2008 rattling its chains. And on that front, the bank may not be wrong. The drumbeat of a global financial crisis is getting louder and closer; in fact, we're probably already in it. Consider the evidence:

This witches' brew of worry could persist for weeks and probably months in low- or mid-level crisis mode until a financial panic sets it off on the boil.  That panic could come from the Greek elections, the U.S. "fiscal cliff" problems, or any kind of unexpected financial disaster. 

No wonder JP Morgan is standing by its bet. It's hard to argue right now that the bank was totally wrong. 

 

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.
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Heidi, good piece. I think the bankers use money market funds as a "whipping boy" to divert attention from the much bigger problems at the banks.

Imagine for a moment that half of the money market funds failed in 2008, and failed with a relatively large loss of 2%. Total losses would only be $27 billion, which is far, far lower than what the banking system inflicted on us. That would not have broken the financial system, and losses would have lower than that.

The losses at Reserve Primary were definitely a surprise, but the amount of damage money market funds can do is limited. Better to focus on the banks, repo markets, and tri-party repo markets. When things turn bad in any of those markets, cascade effects happen because of margin changes and contagion effects.

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