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JP Morgan and Derivatives

May 17, 2012

This link takes you to a story about how JP Morgan lost $2 billion and may lose more. The reason we haven’t seen very much detail on how JP managed to lose so much, to the seeming shock of Wall Street, is because it has to with one of my favorite subjects to write about — derivatives.

Let me put this whole subject into a formula: DERIVATIVES = LEVERAGE + RISK + OBSCURITY = CASINO. And this colossal casino of derivatives, which we have allowed to morph into a quadrillion-dollar unregulated market that no one seems to understand, will one day begin to crumble. Derivatives were the underlying cause of the 2008 meltdown and they’ll be behind the next meltdown as well. And as desirous as our central bankers may be to bail out these losing gamblers, they will eventually be caught like the tourists picking up sea shells on the expanded beach moments before a tsunami hits.

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