JP Morgan fiasco means higher interest rates ahead

May 15, 2012

By Chriss Street

If there was an Academy of Motion Picture Arts and Sciences award for the best acting performance by a CEO, Jamie Dimon of J.P. Morgan Bank would surely win the Oscar for his dismissal of a $2 billion off-shore derivative loss as “a complete tempest in a teapot.”  Dimon tried to use all his theatrical skills to distract the American public from discovering that the U.S. Federal Reserve’s policy of loaning money to banks at zero-interest-rates has made derivative trading wildly profitable, but made lending to American businesses less profitable.

As fallout from the J.P. Morgan fiasco exposes the bloated derivative activities of major banks, the Federal Reserve will be forced to terminate the zero interest rate policy and let rates rise to retard bank speculative actions.  Higher interest rates will stimulate banks to make more commercial and industrial loans, resulting in higher U.S. economic growth.

Achilles Macris, J.P. Morgan’s CIO in their London office, began using the bank’s access to cheap capital from the Fed to amass a huge over-the-counter derivative gamble that high yield and sovereign debt interest rates would fall, after MF Global suffered a $1.2 billion loss on similar bets and was forced to file for bankruptcy last October 30.

Morgan’s gamble became very profitable after December 21 when the European Central Bank began making $640 billion off three year loans at 1 percent interest, referred to as “Long Term Refinancing Operations” — LTROs — available to the banks of Portugal, Ireland, Italy Greece and Spain — the PIIG countries.  By the end of December, J.P. Morgan’s total derivative exposure was $70.2 trillion on just $1.8 trillion of bank assets, according to the U. S. Controller of the Currency.  Morgan is reported to have continued heavy derivative buying in January and February.  Its profits soared again when the ECB announced LTRO2 as another $714 billion in three year low-interest loans to PIIGS banks.

The stock of J.P. Morgan vaulted from $29 per share in December to $45 a share in March as rumors swirled that Achilles Macris and his London team of six had already made $2-3 billion as high yield and sovereign debt interest rates continued to fall.  A jubilant Jamie Dimon announced that J.P. Morgan would increase its dividend and buy back $15 billion of its stock.

France and Greece

Everything seemed rainbows and unicorns for J.P. Morgan until two weeks ago, when France and Greece elected hardcore leftist candidates who want to abandon austerity spending cuts and increase social welfare spending.  Interest rates on the PIIGS sovereign debt shot back up and J.P. Morgan appears to have suffered a $4-5 billion loss.  It also appears the bank has been unable to limit its losses to $2 billion by selling out of their enormous derivative positions.

Jamie Dimon tried to dismiss the losses by promising heads will roll. But congressional hearings will soon illuminate to American taxpayers that the Fed has provided the capital that has allowed America’s three largest banks to engage in $173 trillion in leveraged derivative speculation:

Bank JP Morgan Chase Bank Citibank National Bank Bank of America
Derivative Position

$70,1517,56,000,000

$52,102,260,000,000

$50,102,260,000,000

Total Assets

$1,811,678,000,000

$1,288,658,000,000

$1,451,890,000,000

Leverage Ratio

38.5

40.3

33.4

The derivative exposure of these three banks alone exceeds 11 times the American economy and 2.7 times the economies of all the nations on earth.  On December 30, the derivatives leverage ratio of these three banks stood at 37 times.  Menacingly, this leverage ratio exceeds the average leverage ratio of 32 times assets for Lehman Brothers, Bear Stearns and Merrill Lynch, shortly before the shock of their collapse instigated the start of the Great Recession in 2008.

Federal Reserve Policy

After five years of miserable unemployment numbers and virtually no growth, it seems clear the Federal Reserve’s $2 trillion increase in bank lending at zero interest rates has been better at expanding the international derivatives markets than expanding the American economy.  The Federal Reserve owns much of the blame for this phenomenon.  By keeping interest rates so low, banks were unable to make a rate of return above their cost of capital on traditional lending.

Kansas City Federal Reserve Bank President Thomas Hoenig in a recent interview warned that an extended period of ultra-low interest rates invites speculative behavior:

When you have zero rates that go on indefinitely, you are inviting future problems.”

The recent J.P. Morgan derivatives fiasco has demonstrated that the Fed’s zero interest rate policy has encouraged risky financial speculation that is highly dangerous and potentially destructive.  It’s time for the Fed to let interest rates rise, so banks can get back to the business of financing America’s real-economy.

———————————

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Chriss Street’s latest book: “The Third Way,” now available on   www.amazon.com

36 comments

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  1. Beelzebub
    Beelzebub 15 May, 2012, 12:20

    Chriss, I suggest that you go the Charlie Rose website and watch on video last night’s show about JP Morgan and this $2B fiasco. Some 30-year Wall Street vet and Obama goon (Steve Ratner) and the Managing Editor of the Financial Times (Gillan Tett) were discussing it. Tett really went after Jamie Dimon while Ratner, of course, circled the wagons for his Wall Street buddies.

    The event shows how those who claim we need LESS regulation on Wall Street are SO SO WRONG. JP Morgan took BILLIONS of taxpayer dollars and then gambled them away and CONTINUE TO GAMBLE THEM AWAY without even batting an eyelash. The oligarchs SONTINUE to march forward without any resistance.

    JP Morgan and Dimon REFUSE to tell us the story behind the $2B loss. Not even the shareholders! HAH! More SECRECY condoned by the government. Has Obama chastised them??? NOPE!!! Go look at how much JP Morgan has contributed to his campaign so far!!! HAH!

    You will never hear the libertarians or the ‘free market’ people comment on this. They will continue to say that regulation is evil and that the corporate oligarchs are the good guys. This shows how wrong that opinion is. Dimon gave comments 5 weeks before this debacle that made everything sound at JP Morgan and that it was a great time to invest in his company. As CEO is he claiming he knew NOTHING about this in advance???? BS in my opinion.

    It is time to BREAK UP THE BIG BANKS AND INVESTMENT HOUSES!!! These companies are now able to extort the country, more today than in 2008 in fact due to their growth in size!!! They GAMBLE AND LOSE AND THEN RUN TO THE TAXPAYER FOR A BAILOUT. That would be like you or I going to Vegas, slappin down $20,000 on the roulette table on red – when black appears we run to the casino manager to be made whole with a bailout!!! What do you think he would tell us???

    The corruption and gamed financial system has reached new heights.

    The FBI needs to get to the bottom of this and find out what did what when!!!
    And those who committed crimes need to go to jail!!! BUT FAT CHANCE WITH OBAMA IN OFFICE AND HOLDER IN THE ATTORNEY GENERAL’S OFFICE!!! HAH!!! 😀

    The libertarians need to come clean and ACCEPT THE FACT that Wall Street is dirty and need MUCH MORE OVERSIGHT and they need to have their feet held to the fire (RULE OF LAW) and punished accordingly.

    Anybody who supports JP Morgan here is TOTALLY COMPLICIT in a moral sense in the corruption and fraud that is destroying the nation.

    JAMIE DIMON NEEDS TO COME CLEAN!!!!

    Reply this comment
  2. Ted Steele-- Poodle slayer
    Ted Steele-- Poodle slayer 15 May, 2012, 12:46

    See—- there ya have it beezy——- You and I agree that regulation is needed…..mmmmmmmmmmmmmmm——

    Reply this comment
  3. Beelzebub
    Beelzebub 15 May, 2012, 12:48

    Naturally you would. You only agree with my truth when it happens to support your cause. Otherwise, if there’s nothing in it for you – my truth is bogus.

    Screw you. I don’t need your accolades.

    Reply this comment
  4. Ted Steele-- Poodle slayer
    Ted Steele-- Poodle slayer 15 May, 2012, 12:58

    ooooouch—- it’s hard to stay positive after a reply like that!

    I will soldier on, fighting the good fight!

    Reply this comment
  5. Beelzebub
    Beelzebub 15 May, 2012, 13:34

    Btw, Chriss Street – if JP Morgan is still pulling this crap how many other big investment banks and houses on Wall Street are doing the same??? How much longer until they blow up too??? Oh, but the libertarians tells us that we need to let the ‘free market’ work and forbid regulation. HAH! Sure – on what planet would that work out??? This is a PERFECT example of that. We do not see the FRAUD until the DAMAGE rears it’s ugly heads. Then they all clamor “How did that happen???? We never saw it coming!!! Now bail us out or there will be tanks in the street!!!” HAH! 😀

    You’re a smart guy, Chriss. You know I speak the truth!!! 😉

    Reply this comment
  6. Ulysses Uhaul
    Ulysses Uhaul 15 May, 2012, 13:50

    Few billion down the praire dog hole from the BK solar company chronicles.

    No investigations. No FBI. No call for regulation.

    Just risk that did not work out ya-

    Reply this comment
  7. Beelzebub
    Beelzebub 15 May, 2012, 14:04

    “No investigations. No FBI. No call for regulation”

    I just read that the FBI has entered the picture and has opened an investigation. But IMO that high up it will be a whitewash. After all, FBI directors answer to the DOJ. Who runs that? Wash, rinse, air dry….and repeat again.

    Reply this comment
  8. Rex The Wonder Dog!
    Rex The Wonder Dog! 15 May, 2012, 14:54

    By the end of December, J.P. Morgan’s total derivative exposure was $70.2 trillion on just $1.8 trillion of bank assets

    35-1 levergae, always a two way street with leverage. The sad part is taxpayers will once again get stuck with the losses…….

    Reply this comment
  9. RealityCheck
    RealityCheck 15 May, 2012, 21:18

    Same problem different day, under Greenspan cheap rates led to housing bubble. President Wilson had no business creating Federal Reserve Board.

    Zero interest ay?

    Reply this comment
  10. Beelzebub
    Beelzebub 15 May, 2012, 22:14

    You think JP Morgan is screwing you over??? HAH! 😀

    Watch this:

    http://www.wthr.com/video?clipId=7054149&autostart=true

    You country is being wilfully destroyed from within. Rule of law be damned! Just shut up, open your wallet and pay your damn taxes on time!!!!

    HAH! 😀

    Reply this comment
  11. Beelzebub
    Beelzebub 15 May, 2012, 23:12

    I see that Obama has received over $807,000 from JP Morgan.

    Did you see him on The View today kissing Jamie Dimon’s butt???

    Quite a spectacle to behold!

    The long legged mac daddy likes that hush money.

    It’s all good!!! heh. 😀

    Reply this comment
  12. Ted Steele
    Ted Steele 16 May, 2012, 06:35

    Beezydrip—- Not saying that you’re a racist, but don’t ya think that phrase you like to use is a racist term?

    Reply this comment
  13. Beelzebub
    Beelzebub 16 May, 2012, 06:49

    “Beezydrip—- Not saying that you’re a racist, but don’t ya think that phrase you like to use is a racist term?”

    I’ve proven to you before that ‘long legged mac daddy’ has nothing to do with race. In fact, it was coined by a black pastor. I’ve told you that Bush 2 was a ‘long legged mac daddy’. It’s the equivalent of calling a politician a bloodsucking opportunist. You’ve been warned for the last time.

    Reply this comment
  14. BudFox
    BudFox 16 May, 2012, 08:32

    Jamie Dimon is Simply Too Big to Fail.

    http://thinkbillions.blogspot.com/

    Reply this comment
  15. Ulysses Uhaul
    Ulysses Uhaul 16 May, 2012, 08:34

    Here we go. RACISM

    Can’t we get a grip without lib labels!!!!

    Why do you libs hide behind gates?

    Hypocrites!! Obviously a label. Hmmmm.

    Reply this comment
  16. Ted Steele-- Poodle slayer
    Ted Steele-- Poodle slayer 16 May, 2012, 08:42

    Mr. Uhaul—

    I don’t mean to hide behind a label but it seems to me that the phrase has a certain racial conotation that is rather bad.I know that when Pastor Manning said it many other commentators felt the same way as I do. It seems like a good healthy conversation out here would not have to stoop to such low rhetoric. Wouldn’t it be better for all of us out here if we did?

    Discuss-

    Reply this comment
  17. Beelzebub
    Beelzebub 16 May, 2012, 08:49

    Obviously, you are a race baiter, Teddy. You want to see things that aren’t there and play the ‘race card’ to denegrate other posters. Such vitriol should not be allowed here. If you dissect the phrase ‘mac daddy’ you would learn that it is of French origin and did not apply to any specific race. You should really be ashamed of yourself for stooping this low. But perhaps you aren’t capable of shame. I don’t know.

    Reply this comment
  18. Ted Steele-- Poodle slayer
    Ted Steele-- Poodle slayer 16 May, 2012, 09:16

    Beezy— I am capable of shame, of course. It just seems to me, my opinion and all, that the term when used in the context to describe an African American who someone dislikes is derogatory and derogatory in the context of race. Truly in operation the term seems to be sort of an urban term and often applied to criminals of color. While I know it certainly could be applied to a person of any race, it seems to me that the term was applied by Pastor Manning in the context of its urban and racial use notwithstanding The Rt. Rev Mannings status as black. You know of course in the greater African American community often one will see other racial epithets self applied that would be quite inappropriate for say a caucasion person to use. In some nieghborhoods it might actually lead to the application of force to the non black person so applying the moniker.

    Anyway—- you seem like a “fairly” bright guy. You can do better.

    Ted

    Reply this comment
  19. Ulysses Uhaul
    Ulysses Uhaul 16 May, 2012, 09:33

    Poodle slaying is animal abuse, a lib no no!

    Reply this comment
  20. Beelzebub
    Beelzebub 16 May, 2012, 09:45

    “It just seems to me, my opinion and all, that the term when used in the context to describe an African American who someone dislikes is derogatory and derogatory in the context of race”

    But you haven’t even a scintilla of proof to support your opinion, do you race baiter??? Nothing at all. It’s the world according to Teddy. Proof be damned!!

    IMO you are the worst kind of poster. You characterize other posters as racists without having any proof source whatsoever to back up your claim.

    IMO if anyone should get banned from a comment boards, it should be people just like you.

    For claiming that I employ racist terms WITHOUT PROOF – you are a low-life bottom of the scum bucket race baiter.

    There, how’d that feel???

    Reply this comment
  21. Ulysses Uhaul
    Ulysses Uhaul 16 May, 2012, 09:54

    When you have no answers reach for racism, rape, harassment, discrimination, wife beater, capitalist, 1%’er.

    Can’t lose.

    Reply this comment
  22. Beelzebub
    Beelzebub 16 May, 2012, 10:00

    “When you have no answers reach for racism, rape, harassment, discrimination, wife beater, capitalist, 1%’er.

    Can’t lose”

    I even offered him PROOF that he was wrong, Ulysses.

    The origin of the phrase ‘mac daddy’ is French with no relation to race. In fact, it was generally applied to white euro males – in both France and the UK.

    Even in the face of the evidence that I presented the sniveling race baiter continues to characterize me, directly or indirectly, as a ‘racist’ for criticizing a half-white and half-black POTUS.

    This is typical leftist tactics. If they can’t hit you head on and win – they will try to blindside you with diversions, inneudos or bald-faced lies.

    And even when proven wrong – no apology or retraction.

    Bottom of the scum bucket.

    Reply this comment
  23. Ted Steele-- Poodle slayer
    Ted Steele-- Poodle slayer 16 May, 2012, 10:48

    Beezy—- I don’t know you.

    I don’t mean to imply that you are a racist.

    I am saying that the term in this context is. I felt that way when his Holiness Bishop Manning used it.

    Unlike your previous post, I don’t care if any politician is half white or half black or gay or straight or Mormon or Christian or Hindu whatever.

    I am sorry if my observation irritates you. I find alot of what you say agrivating too, but not all of it.Sometimes I find myself agreeing with some of your observations and of other conservative folks out here and that’s why I read this blog every day.

    Your pal, Ted the contrite

    Reply this comment
  24. Beelzebub
    Beelzebub 16 May, 2012, 11:19

    First off, I don’t consider you to be my ‘pal’ – so let’s stop with the BS, okay?

    You are a race baiter. Had I called George W. Bush a “long-legged mac daddy” first you wouldn’t have said crap. Yet George W. Bush belongs to both the human race and the caucasion race. And I firmly believe that Bush was as big a “long-legged mac daddy” as Obama. The very history of “mac daddy” shows that it is not a race related phrase. I proved that. Long-legged simply means that Obama is one of the top dog mac daddies. That’s all.

    You race baiters are very evil. You remind me of the media and Obama and the liberals in the George Zimmerman – Trayvon Martin case – who unfairly and unjustly pulverized Zimmerman and goaded the so-called “justice system” to lodge criminal charges against an innocent man. The medical documentation has been released. Zimmerman suffered a broken nose, lacerations on the face, 2 black eyes and cuts on the back of his head. Martin only has lacerations on his knuckles. CLEAR EVIDENCE OF SELF-DEFENSE ON PART OF ZIMMERMAN!!! He was charged due to the color of his skin. We haven’t really progressed since the 1800’s have we??? And pukes like you are the reason.

    Reply this comment
  25. Ted Steele-- Poodle slayer
    Ted Steele-- Poodle slayer 16 May, 2012, 11:31

    “…pukes like me…?” OOOOOuch

    Well, sorry you feel that way.

    Ya know, I used to work on a national liberal newsletter/website during the time of W. I ran it actually. We had about 25 employees, no big thing. Everyone there was a dyed in the wool liberal. I did not like W’s policies at all. EVERYone there more or less very strongly disliked/hated him.

    I NEVER let anyone write in a disrespectful way about him personally. I insisted that he be referred to as president Bush or the President in stories we did. The kids who worked for me liked to call him simply “Bush”. I did that not to get any merit badges but because I love my Country and the office of the Pres. End of story. We need more respect for whatever poor soul gets that job.

    This is at the root of my trouble with your reference.

    Your associate– Ted

    Reply this comment
  26. Rex The Wonder Dog!
    Rex The Wonder Dog! 16 May, 2012, 12:08

    Beelz, ease up, Teddy is melting down 😉

    Reply this comment
  27. Ted Steele-- Poodle slayer
    Ted Steele-- Poodle slayer 16 May, 2012, 12:38

    Thanks Poodle
    I appreciate the support
    mmmmmmmmmmmmmmmmmm nice

    Reply this comment
  28. Beelzebub
    Beelzebub 16 May, 2012, 14:50

    “We need more respect for whatever poor soul gets that job”

    I will respect the POTUS when he or she respects me and the rest of the American people. Not until then.

    I gave Obama a 6-mos grace period when he first entered office. I withheld all judgment during that time. Then I caught him in lies, broken promises, in violations of the US Constitution and in eroding the civil rights of my American brothers and sisters. At that point I lost all respect for the man and I have no problem with expressing that. I don’t write a newsletter either. So I don’t have to be nice. Stuff that in your pipe and smoke it.

    Reply this comment
  29. Ted Steele-- Poodle slayer
    Ted Steele-- Poodle slayer 16 May, 2012, 15:17

    OK angry man.

    Reply this comment
  30. Rex The Wonder Dog!
    Rex The Wonder Dog! 16 May, 2012, 16:16

    Stuff that in your pipe and smoke it.

    LOL…Teddys head just expolded 😉

    Reply this comment
  31. Ted Steele
    Ted Steele 16 May, 2012, 20:21

    it did? LOL ™

    Reply this comment
  32. Beelzebub
    Beelzebub 16 May, 2012, 21:11

    Trade mark unnecessary, Teddy. I’ll inform you when it is. 😀

    Reply this comment
  33. The Ted Steele System
    The Ted Steele System 17 May, 2012, 21:42

    OK Bezyboob ™

    Reply this comment
  34. Beelzebub
    Beelzebub 17 May, 2012, 22:04

    You should file an app for a trademark on failed humor. I bet they’d give you one.

    Reply this comment
  35. The Ted Steele System
    The Ted Steele System 18 May, 2012, 06:51

    some might disagree with you Beezyboob ™

    Reply this comment

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