The Money Chasers

timwilliams By timwilliams, 29th Jul 2013 | Follow this author | RSS Feed | Short URL
Posted in Wikinut>Business>Accounting & Finance

How Wall Street continues to reap billions of dollars profit every year.

The Money Chasers

Straight out of a Hollywood script you might say when a Deja vu episode unfolded. This time where 2 billion dollars vanished from the coffers of JP Morgan. It was only a few years ago that the entire financial world almost came crashing down. If it wasn't for the bail out by the US government of the many financial institutions, the world that we now know would be far different today. Although many economists now think the exorbitant amount of funding that went into that bailout would have been far better suited if more people were given a large enough infusion of readily available cash many of today's problems would have been eliminated. But, instead the financial world received an infusion that staved off an Armageddon like scenario of the financial world. Along with that initial bail out came new regulations that would ensure that the financial institutions would never again be able to actually behave like an alcoholic in a gin mill. Little did the rest of us realize the those regulations that came into play would soon become obsolete.

When Warren Buffet warned of the potential danger in the derivatives markets he was right to point out the precarious dangers that our own financial institution are still putting investors money in. Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit. However, the strong creditor protections afforded to derivatives counter parties, in combination with their complexity and their continued lack of transparency, can cause capital markets to under price credit risk. This can contribute to credit booms, and increase systemic risks. Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counter parties contributed to the financial crisis of 2008 in the United States. Since the financial crisis of 2008 those reforms have served only to reinforce special protections for derivatives, including greater access to government guarantees.

Derivatives can be used for the most part for speculating purposes. In other words like a gambler placing bets on a roulette wheel today's financiers continue to gamble with other people's money. When they do this they in turn Hedge this speculation with what is called a hedge or insurance. For example a better or speculator as the banking industry refers to them may sell a stock expecting this particular stock price to plummet but is exposing himself to potentially unlimited losses. Very often companies buy currency forwards in order to limit losses due to fluctuations in exchange rates of two currencies. There are some who might point out in this case it was between the Euro and the Dollar.

Now, when news broke of a 2 billion dollar trading loss by JP Morgan, much of the financial world and the rest of millions of people who put their hard earned money into Chase bank accounts again came the dismay and almost outrage that such a mishap of this magnitude could happen again. This may be just the beginning of things to come. According to many this is just a very small preview of what is going to happen when we see the collapse of the worldwide derivatives market. When most Americans think of Wall Street, they think of a bunch of stuffy bankers trading stocks and bonds. But over the past couple of decades Wall Street has evolved into the biggest casino in the entire world. Bigger than Las Vegas or Monte Carlo put together. When the too big to fail banks make good bets, they make a lot of money. When they make bad bets, they can lose a lot of money, and that is exactly what just happened to JP Morgan. Their Chief Investment Office made a series of trades which turned out horribly, and it resulted in a loss of over 2 billion dollars over the past 40 days. But 2 billion dollars is still small potatoes compared to the vast size of the global derivatives market. It has been estimated that the the notional value of all the derivatives in the world is somewhere between 600 trillion dollars and 1.5 quadrillion dollars. Nobody really knows the real amount, but when this derivatives bubble finally bursts and most likely it will there is not going to be nearly enough money any where in the world that will be able to compensate for all that is lost.

Sadly, a lot of mainstream news reports are not even using the word “derivatives” when they discuss what just happened at JP Morgan. It was only a short time after the breaking news of this 2 billion loss by JP Morgan that some are calling it as simply a bad bet. Perhaps that is easier for the American people to understand. But in reality what just transpired at JP Morgan is only the tip of the ice burg when it comes to risky speculation. It doesn't help when the rest of Europe is on the verge of an imminent financial catastrophe. Most don't realize that the fiasco at JP Morgan happened over seas in London where JP Morgan's trading portfolio tops over 350 billion. Now take into consideration the initial trader in London who incidentally is named the London Whale who was in charge of trading transactions sought to improve the banks financial gains may have congealed the New York' chief investment officer to sanction trades and to shield them from Europe's economic troubles. Unfortunately when the markets shifted in early April the hedging transactions that were intended to minimize bank losses in fact only accelerated them into a multibillion dollar hit. This made a series of really bad bets go so terribly wrong. CEO Jamie Dimon admitted that the strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”. The funny thing is that JP Morgan is considered to be much more “risk averse” than most other major Wall Street financial institutions are. So if this kind of event is happening at JP Morgan, then what else is happening in the world of high finance and going on at other financial institutions?

To find the answers we have to really figure out what Hedging and what derivatives actually do to the financial stability of our financial institutions. According to a recent article this failed hedge was likely a bet on the flattening of a credit derivative curve, part of the CDX family of investment grade credit indices. JP Morgan was then caught by the sharp moves at the long end of the bet. The CDX index gives traders exposure to credit risk across a wide range of assets and gets its value from a basket of individual credit derivatives. What it all boils down to is that JP Morgan made a series of bets that should have been avoided in the first place considering the volatility of the financial climate in Europe today.

All Through-out history there are those who use dubious methods to reap financial rewards or lose their shirts, literally. A prime example of how the wealthy regain and retain wealth happened at the height of the battle of Waterloo in 1815. The Battle of Waterloo in 1815 proved to be most significant in that the outcome gave the Rothchilds complete control over the Bank of England. Which in essence enabled them to control the British Empire and the rest of the countries of Europe. Had England lost that battle the Rothchilds still would have made out because they bet on both sides guaranteeing them extreme wealth. This is because by placing bets or speculating on both sides so no matter the outcome only the Rothchild's would come out wealthier. But, as it turned out when Nepoleon lost the battle of Waterloo the bank of England was now controlled by the most wealthiest of families in the world at the time. They could now put into practice literally by controlling not only the Bank of England but now all the other European countries central banks and finances. The Rothchilds used their dominance to control countries and events to gain even more power and wealth. Sounds like the Republican agenda of today?

Today what we are seeing is like the Rothchild's of the 1800's Wall Street financiers are again running extreme risks with the deposits that millions of people who put their trust and hard earned money into accounts. Where these so called "Wizards" of high finances will not only insure their money, guarantee it's safety, but will use that money to improve the profitability and stability of those financial institutions. This along with government oversight and transparency of transactions should be sufficient to guarantee that all deposits are safe and generate more interest for the depositor. But for the past two decades what the United States has witnessed is that Wall Street has run amok with the greed of the promise of instant gratification of garnishing more wealth in the shortest amount of time, The Business world has only followed in their footsteps in the business practices that are occurring all around the globe today.

Let's hope that the banks like JPMorgan don't end up using the loosely interpreted set guidelines set forth by congress following the 2008 financial disaster and set a course for more speculation when the financial markets only reflect turmoil in so many countries all over the world. In the world today there are too many that are so economically depressed it could very well cause a financial nightmare for years to come.The damaging economic conditions in southern Europe,the continued violence and instability in the Mid-East and the continued plight of millions of Americans that can never seem to get ahead all continues to disrupt the financial world. When the United States figures out that the best way to stave off a coming financial catastrophe is with the implementation of National Economic Reform which includes the safeguards to prevent such gross negligence of our financial institutions like what happened at JP Morgan will the United States avert disaster in the making.


Money, The Economy, Wall Street

Meet the author

author avatar timwilliams
I am a feature writer for The Tampa Bay Examiner and The American chronicle. Earned Ph.D in Economics

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author avatar cnwriter..carolina
29th Jul 2013 (#)

thank you so much Tim for this clearly written expose of what goes on...

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author avatar cnwriter..carolina
30th Jul 2013 (#)

i find it interesting reading some of the new people with their greed for more followers...writing does not seem important anymore just get me give me etc etc...want to throw up...sorry Tim had to voice glad you still writing informative pages....

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author avatar Retired
3rd Nov 2013 (#)

This is an important topic, Tim. As you suggested, we are in for more trouble. The Dodd-Frank Act passed in 2010 is supposed to prevent the kinds of abuses that led to the Meltdown in 2008, but...

Such is the power of Wall Street that they helped write Dodd-Frank, and ever since it passed they have been lobbying and obstructing its already watered-down provisions. Such is their power to, in effect, control government!!!

There is increasing evidence that the activities of Wall Street leading up the crash in '08 were not only unethical and reckless, but in many cases, criminal. Yet not one higher executive has been indicted. Again, such is the power of Wall Street. It's not over yet!!!

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