Uh Oh, JP Morgan is the new AIG...
Tim Geithner may have to ask the Congress for another $700 billion to save the banks again.
J.P. Morgan Struggles to Unwind Huge Bets
The company is holding derivative wagers with a face value of roughly $100 billion in a derivative index tracking the health of corporate debt, according to a person familiar with the bank's trading. These wagers include long and short positions, or bets that index will either rise or fall, from various parts of the firm.
J.P. Morgan's chief investment office, which racked up the trading losses, is believed by traders to be mostly long this index. Thus, if nervousness increases about the credit-worthiness of the investment-grade- rated companies making up the index, the bank's overall losses would likely grow, say people familiar with the matter.
J.P. Morgan's situation is complicated by the fact that it controls a big percentage of the outstanding trades on the index. According to data from IntercontinentalExchange Inc., which operates a clearinghouse for credit derivatives, positions on the index amount to about $785 billion. That figure doesn't reflect all trading activity in the index because many derivative trades aren't put through a clearinghouse. Any move by J.P. Morgan to sell positions could further drive down their value, traders say.
Since May 10, the day J.P. Morgan disclosed its large trading loss, the cost of protection on the CDX "Series 9" index tied to investment-grade companies has jumped sharply, according to data provider Markit.
A buyer of protection that expires in December 2017 now has to pay $162,000 a year for every $10 million in face value, versus $128,000 just over a week ago, representing a 24% increase. The price move indicates J.P. Morgan, which had sold protection maturing in December 2017, is in a losing position.
But the bank had bought protection on the same index expiring in December 2012, and the cost of that protection has risen 19.6% since last Thursday, which may have offset some of J.P. Morgan's losses.
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