JPMorgan Chase - Credit Derivatives, Interest-Rate Swaps

JPMorgan Chase & Co. is a global financial services firm with assets of $2.1 trillion and operations in more than 60 countries. For years, the company made big profits by arranging complex investment deals involving credit derivatives for states, cities, hospitals, school districts and other entities that sell debt in the municipal bond market.

In 2007, the collapse of the subprime market and the subsequent liquidity squeeze caused many of these financing arrangements to sour, forcing countless public agencies to come up with billions of dollars to pay for increased interest payment costs.

JPMorgan also is credited with launching the credit derivatives market back in the late 1990s, a market that billionaire investor Warren Buffett has often referred to as “weapons of mass destruction.”

Holy Smokes, JPMorgan Chase Holding $92,000,000,000,000 in Derivatives

That's $92 trillion for those who aren't able to count that many zeros. Here's the complete chart if you want to see what other banks are holding. Do the math: $92 trillion is 74 times JPMorgan's assets and 7 times the entire Gross Domestic Product of the United States.

The value is a "notional value," meaning they didn't actually spend $92 trillion to acquire the contracts. Derivatives are highly leveraged (which can actually make them worse). But their "direct exposure" is a lot less than $92 trillion, as much of the derivatives are hedged.

However, no one knows exactly what derivatives JPM, or any bank, are holding (the derivative system is entirely unregulated); and as Warren Buffet pointed out in 2002, bankers cannot be trusted to just "do the right thing" with derivatives.

It's impossible that 100% of JPM's derivatives are hedged, but surely the vast majority are. But when you're talking $92 trillion, the tinniest mistake can spell doom: a 1.7% adjustment of the $92 trillion wipes out their assets.

It's interesting that JPM has yet to really tank, compared to most of its peers. That may be coming soon though. Their Chase division of course has massive exposure to consumer credit card debt, which is the next shoe to drop. Not to mention JPM acquired Bear Stearns, a cesspool of toxic waste.

Source for the data:
Comptroller of the Currency
OCC’s Quarterly Report on Bank Derivatives Activities (p. 21)
Third Quarter 2007