[BillyJack]

http://www.financialsense.com/Market/daily/monday.htm

"J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business."


Danger in Derivatives
The media attention has been on the companies that have defaulted on their loans or have filed for bankruptcy protection. To a lesser extent, the attention has been on the banks. A credit bubble has two sides to the equation: the borrower (Enron, Global Crossing, Kmart WorldCom) and the lender (J.P. Morgan Chase, Citigroup, Bank America). Banks have not only been the lender and underwriters on much of this debt, they have also been the writer of derivatives that go hand-in-hand with the expansion of credit. In fact, bank derivative growth has been growing at double-digit rates over the last decade. During the first quarter of this year the notional value of derivatives in bank portfolios increased by $946 billion. Interest rate contracts increased by $972 billion to $39.3 trillion. So in addition to the debt debacle, you also have the danger of another derivative debacle such as we had with LTCM back in 1998. Many of the top banks such as J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business.

On top of making bad loans, the banks also have exposure as the largest underwriters in the derivative business. J.P. Morgan Chase is leveraged over 700-1 when you look at the bank's exposure to derivatives. The net equity of JPM has to back those derivatives. If you look at J.P. Morgan Chase’s derivative book, the bank looks and acts more like a hedge fund then it does a pillar of stability of the financial establishment. The credit problems are only one side of the problem. No one knows what the bank's derivative risks are other than that they have $23.4 trillion in derivatives against equity of around $40 billion.

This isn’t the only problem the bank has at the moment. J.P. Morgan Chase and Citigroup made $5 billion in cash loans using complex transactions that were disguised as energy trades. This made the loans hidden from Enron’s balance sheet. Investigators found out that J.P. Morgan and Citigroup were Enron’s main source of prepay funding. The Senate Governmental Affairs subcommittee is now looking into the extent to what these banks knew and the role they may have played in aiding Enron’s accounting deceptions. J.P. Morgan promoted prepay loans to customers in the 90’s because of their “balance sheet friendly” nature. In addition to the Senate, the Manhattan’ district attorney’s office is looking into the role J.P. Morgan Chase played in making offshore loans to companies in an effort to keep the debt off the balance sheet. Insurance companies, which issued surety bonds as guarantees that Enron would repay its offshore loans, are now suing the banks because they claim the banks kept knowledge of the company’s perilous financial condition from them."

[Dog]

Ping

[crypt2k]

$23.4 trillion ain't chicken feed.

[Endeavor]

Please be gentle here, I rarely even balance my checking account.

My first reaction upon reading your post was that there must be a few greedy people in deal making positions in Morgan and Citibank that made these loans because they'd have to know that these were not only shady, but also that Enron had no real way to pay them back.

But, after I read through the thing, I'm left wondering, given the banks' other money-lending policies,if the whole darn lot of them weren't in cahoots on the whole thing - they were willingly running their companies into the ground solely because of their own personal greed (just like the Enron execs). Is that the correct read?

[Torie]

The source for this appears rather thin. Just who is Jim Puplava?

[Arleigh]

J.P. Morgan Chase is leveraged over 700-1 when you look at the bank's exposure to derivatives.

This bears repeating!

Also, the point of derivatives is often to insure against some unfavorable market event. If JP Morgan Chase can't pay up, the innocent counter-party gets screwed. Like wrecking your car and then finding out the insurance company can't pay your claim.

Big mortgage lenders like Fannie Mae and Freddi Mac borrow short and lend long, but use derivatives to hedge the risk of rising interest rates. But if the hedge is no good, then they're quickly in trouble and Uncle Sam will have to bail them out.

[AppyPappy]

S&L redux

[#3Fan]

No one knows what the bank's derivative risks are other than that they have $23.4 trillion in derivatives against equity of around $40 billion

$23.4 trillion. Uh oh.

[Axenolith]

Have you seen where JP Morgan raised CitiBank from "hold" to a "buy" this morning? Boy, I tell ya, I'm just gonna have to run out and buy some... NOT!!