JP Morgan Derivatives Exposure: Systemic Risk Is Everywhere

The $2 billion loss of JP Morgan in derivatives trading is signaling, once again, the enormous risks big banks take with taxpayer backing. All U.S. banks are covered by the FDIC, and if a loss is big enough, it could threaten the financial system just as it did in 2008. JP Morgan has $70 trillion in total derivative exposure. The entire world has a little more than $700 trillion in derivative exposure, and one bank has 10% of all the derivative exposure on the planet! If JP Morgan gets into trouble, it alone could cause systemic failure. Today, the FBI announced an investigation into the surprise $2 billion (or more) trading loss that happened last week at the bank. Reuters reported, “The probe was seen in some quarters as necessary, given the ongoing debate in Washington about bank regulation and reform, and one expert said it raised the level of concern around what happened. ‘The FBI looks for evidence of crimes and goes after people who it alleges are criminals. They want to send people to jail. The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI,’ said Erik Gordon, a professor in the law and business schools at the University of Michigan.” (Click here for the complete Reuters story.)

The Obama Administration has to be very worried about JP Morgan which has the biggest derivative exposure ($70.1 trillion) of American banks. The next 4 big U.S. banks after JP Morgan, also, have huge derivative exposure. Citibank has $52.1 trillion in total derivatives, Bank of America has $50.1 trillion, Goldman Sachs has 44.2 trillion and HSBC USA has $4.3 trillion in total derivatives. Combined, the five biggest commercial banks have $220.9 trillion in total derivative contracts. Weigh that against the combined assets of those same top five banks of just $4.8 trillion, and you get an eye popping 46 to 1 leverage! What could go wrong? (Click here for the OCC 4^th quarter report.) Please remember, in 2009, the Financial Accounting Standards Board (FASB) changed how banks value assets such as real estate and mortgage-backed securities to whatever the institution thinks they’ll fetch in the future. These “assets” are not valued at what they would sell for today. I call this “government sanctioned accounting fraud.” (more)