Tag Archives: Crisis

Clearing The Bull: JP Morgan And Derivatives Derangement Syndrome (DDS)

The headline writers are at it again as just about every publication that can spell the word derivatives is bemoaning JP Morgan’s $2 billion credit derivatives loss. Meanwhile, on planet Earth, the EU continues to sink under hundreds of billions of dollars of debt.

JP Morgan’s $2 billion credit derivatives loss is, in reality and the greater scheme of things, a non-story.  It’s a 1% loss on a $200 billion investment portfolio. It is a 0.1% impairment of a $2 trillion balance sheet. This is minor when compared to the hundreds of billions of dollars in junk and distressed Eurozone sovereign debt.

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The Disastrous History of Financial and Market Dogma

Like alchemists on an eternal quest for a method for turning base metals into gold, the financial markets have proved susceptible to one dogma after another—with disastrous consequences.

One of the primary causes of the massive growth in the subprime market was the idea that if you took a well-diversified portfolio of sub-investment grade loans you could convert them into AAA securities. Some market professionals were even of the opinion that the level of risk reduction that could be achieved through diversification could effectively, with the aid of a few credit derivatives, immunize banks from any significant losses whatsoever.

While acknowledging that was the prevailing view, Alan Greenspan the former Fed Chairman had another perspective. In a column in the Financial Times of March 26, 2009 Greenspan stated:

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Interview with Jonathan Ledwidge

The following interview with Jonathan Ledwidge on the newly published book, Clearing The Bull, was posted in the Cass Business School Alumni magazine.

http://community.city.ac.uk/NetCommunity/Page.aspx?pid=654&dm_i=O8Q,QAHJ,3DI6FD,24D5U,1