What Exactly Did J.P. Morgan Do Wrong: A Full Explanation in Simple Terms

We originally wrote and posted this article article on Stocks on Wall Street a month ago, May 13th, when this J.P. Morgan crisis first arose however we are reposting it for the benefit of many of our readers who are still confused about this whole J.P. Morgan fiasco & why Jamie Dimon is testifying infront of Capitol Hill. As a result, here’s Stocks on Wall Street’s explanation in simple terms!

This most recent J.P. Morgan fiasco has only further differentiated the separation between Wall Street and Main Street. Frankly, most of Main Street has no clue what even actually went on within J.P. Morgan. The Financial Times simply explains that:

“J.P. Morgan chose IWM as an attempted hedge for their exposure under their umbrella of prop traders, not because everyone was long IWM as no one was, but because it figured to be correlated to everyone’s exposures, with an even higher beta which is to say that if someone lost money on a billion dollar long portfolio, J.P. Morgan would expect to make even more money on a billion dollar short IWM position this was by design, as their hedge was much smaller than aggregate long notionals.”

WHAT? Lol ya right that’s what most of you are saying? Probably had most of you lost and confused at the word ‘Prop Traders’ lol! This is the disconnect between Wall Street and Main Street that I’m talking about. When talking about J.P. Morgan’s problems I’m going to try and keep it in simple terms so for once both Wall Street and Main Street readers can understand something together.

“What really happened with JPM was their CIO department put a hedge, form of protection, on a $100 billion dollar bet and the hedge didn’t do what they intended it to, hence the reason I am even talking about J.P. Morgan and their recent losses, firings, and government probe.”

To add to this explanation we would like to present a well-explained graph given to us by the New York Times:


Hope this makes things a little easier  to understand. That’s the first real problem with our banks today, the fact they are way to complicated for even the most advanced financial analyststo understand. JPM’s latest 10Q was a short 176 pages and that’s their reformatted version recreated to put double the text on each digital “page.”

Ask Yourself These Three Questions

Put aside J.P. Morgan as they are only a small part of this underlying issue. The bigger issue at hand is the fact that even after the bailouts, TARP money, government assistance are many of our banks still ‘To Big Too Fail?’

Are these banks still taking far too much risk, leveraging huge portions of the banks capital into risky investments that if by chance failed they would cause a sysemisc title wave causing the bank to crash while bringing down the whole sector and economy requiring much more government bailouts and intervention all at the cost of the American Taxpayer?

J.P. Morgan’s market cap is only $140 billion, just think if that position bottomed out and the bank had lost everything. I know they hedged the position and this is theoretically very unlikely, but what if? How would the stock market and economy react to one of our most healthy and stable banks failing?

Armageddon, that’s what it’s called!

Don’t get me wrong, I’m the biggest critic of government anything but in this case for the sake of the American taxpayer and our economy we should hedge our risk and instill some new form of Wall Street reform that this time around actually works. That’s right, policies that work! I’m all for Mitt Romney and the Republican’s decision to repeal Dodd-Frank, not because I don’t believe in Wall Street Reform but because if anything Dodd-Frank has been an epic failure and might have even made things worse. So what should the government do? I haven’t quite got the answer to that answer yet, but stay tuned to Stocks on Wall Street as when I do I’ll make sure to share it with everyone. In the meantime, below I have posted a few great articles outlying potential government plans for regulating the banking sector and plans to break up the big banks:

At JP Morgan Chase, a Complex Strategy That Backfired (The New York Times)

Breaking Up Four Big Banks (Economix)

FDIC to Layout New Plan for Big Bank Failures (The Wall Street Journal)

How Wall Street Killed Financial Reform? (The Rolling Stones)

SEC Disagrees with Supreme Court’s Anti-US Investor Morrison Decision (The Angry Bear)

 Too Big To Hedge (FT Alphaville)

Why Can’t Obama Bring Wall Street to Justice? (The Daily Beast)

In two separate interviews, one before and one after JPMorgan Chase’s $2 billion trading loss, CEO Jamie Dimon talks about the company’s crisis.

Please let us know what you think about the whole J.P. Morgan fiasco and what you would do to fix/reform the banking sector? Share your thoughts by leaving a comment below or post on either our Facebook or Twitter!

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