New York Times:
"Losses on JP Morgan Chase’s bungled trade could total as much as $9 billion, far exceeding earlier public estimates, according to people who have been briefed on the situation.
Essentially, JPMorgan has been operating a hedge fund with federal insured deposits within a bank,” said Mark Williams, a professor of finance at Boston University, who also served as a Federal Reserve bank examiner."
Opinion:
On May 30, we said this: "I really hope I am wrong on this, but there seems to be a significant problem unwinding JP Morgan's derivatives trade."
Since then several well known financial analysts have downplayed the derivatives trade.
Let's review:
1. Derivatives are sometimes extremely illiquid, especially when one party to the trade holds a losing position that is dominating the market. There is no one willing to take the other side of the trade; thereby making the loss virtually unlimited.
2. On May 30, Linn Truner (former SEC head) said, "They (JP Morgan) really made two stupid decisions: The first was taking risks with derivatives that they did not understand, the second is selling (profitable) assets with high income that they can't replace."
3. There is an old Wall Street (panic) adage that says "Sell to who?", meaning that when you are in a big losing trade and dominate the liquidity, who is going to buy the position from you? If the markets keep going against you, the trade could go on indefinitely and the losses would continue to rise.
4. Keep in mind that this is a 'too big to fail' bank; the Federal government would be forced to bail it out with taxpayer money (as it did in 2008). Money that would have to be borrowed or created.
5. First, the loss was 2 billion, then 3 and possibly as much as 5 billion. Well now, it could reach 9 billion.
The truth is that no one knows how big this loss could get.
I really did hope I was wrong.