Friday, June 15, 2012

What Comes After A Trillion?

A few weeks back news broke that a portion of the derivatives unit at JP Morgan had made a major mistake on a trade that essentially blew up in their face. The trade (so far based on what we know) has cost JP Morgan $2 billion in losses. Jamie Dimon, the CEO of the bank, was forced to hold an emergency conference call after hours with investors to discuss the losses.

Derivatives have been famously called by Warren Buffett weapons of mass destruction. Their size has grown so enormous in the financial market that no political leader even dares mention the topic of their regulation. The derivatives market can be thought of as an enormous atomic bomb resting in the ocean with the power to blow up the entire planet. Think that is an exaggeration?

The following chart shows the size of the derivatives market (red line) compared to other major asset classes around the world. The spec next to the red line in green is the entire global annual GDP. The yellow line is the sum total value of the entire global stock market.


Estimates show that the derivatives market is now somewhere between 700 trillion and 1 quadrillion dollars in size. It grows rapidly every year, like a contagious plague spreading through the financial system.

JP Morgan is by far the largest participant in the derivatives market. They are approaching close to $100 trillion in derivatives just on their own. The following chart shows their total holdings (red line) next to the assets they have backing potential losses (light green line next to it).




Why does this matter? If anything should happen to these precious banks or their balance sheet we now know that the government (taxpayers) stand behind them 100%. They have become wards of the state who collect endless millions in bonus payouts when derivatives contracts go well and turn to the Federal Reserve and tax payers when they go bad.

This week the Senate banking committee held a hearing where they wished to investigate this derivatives "thing" they have heard about on the news. Who has paid for the Senators to receive their seat on the senate?

JP Morgan and Jamie Dimon

The following chart put together from Zero Hedge shows that this committee has received $877,798 in campaign contributions from JP Morgan.




Who is the number one campaign contributor for the man in charge of the committee, the chairman Tim Johnson?

JP Morgan and Jamie Dimon

The testimony of course immediately turned into a clown show where the committee members groveled at Dimon's feet and asked him how they should regulate JP Morgan in the future. The following clip from the Daily Show sums it up perfectly. 






h/t Political Metals, Safe Haven, Zero Hedge

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