While that essay involves some truly large numbers, the author fails to justify the alarm he is trying to convey.
The fourth from last paragraph, IMO, contains the essence of the point being made. I quote: "We believe that JPM’s management is taking a mammoth gamble with the wealth of its shareholders by supporting derivatives with a notional value of over $26 TRILLION dollars with a relatively trifling $42 billion of shareholder equity. Any discontinuous market volatility event that is unforeseen and beyond JPM management’s control could conceivably cause this immense pyramid to rapidly unwind, utterly annihilating the company’s capital in a matter of days or weeks."
However, the piece fails to go into specifics of the mechanics of what type of unforeseen event could cause the calamity. This is a blatant omission considering the length of the article and the repetition of the high risk.
Without breaking down the exact nature (rather than categories) of the derivatives held, the assertion of a potential calamity cannot be justified. Merely repeating the emphasis on large numbers and high ratios does not win any cigar from me.
Here is an example of how leverage does not necessarily equate to high risk. As of Friday's prices, I could have bought a Nov $75 put contract on IBM for $25. My total risk would be $25. But I can make a large number out of this by pointing out that the contract controls 100 shares of IBM valued currently at $102.65 each. So the notional value implied by the put contract is $10,265. To follow the essay's logic, I would say "Oh my God, the notional value of that put contract is $10,265, what a high risk". Of course, that is alarmist. The risk involved is precisely $25. The $10,265 amount is an irrelevant fictitious amount, and the relevance of the essay's notional values in the tens of trillions is not proven by the logic in that essay.
I don't dispute that a calamity may be caused by JPM's holdings - I'm just saying the essay does not put forth evidence that can lead you to that conclusion. Might the author have a gripe or an ulterior motive, or is there something I am not understanding? |
