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Friday, May 11, 2012

There is Nothing Wrong...

~reposted from

I can picture it clearly:  It’s 1963 and 10-year old Benny Bernanke sits staring at the black & white Zenith in the living room of his East Jefferson Street house, captivated by the voice of Vic Perrin…
“There is nothing wrong with your television set.  Do not attempt to adjust the picture.  We are controlling transmission.  We will control the horizontal.  We will control the vertical.  We can change the focus to a soft blur, or sharpen it to crystal clarity.  For the next hour, sit quietly and we will control all that you see and hear. You are about to participate in a great adventure.  You are about to experience the awe and mystery which reaches from the inner mind to the outer limits.”
click above for a trip down memory lane
These were the formative years for the future leader of the financial world.  The idea that anyone could completely alter someone else’s reality must have captivated him then, as it clearly does now.
How else to explain the market’s rise after one of the world’s biggest banks admitted to [tip: think icebergs] a $2 billion trading loss on what they insisted was a matched book?

Now, $2 billion clearly isn’t going to ruin JP Morgan Chase.  They have $1.2 trillion in assets and $112 billion in Tier 1 capital.  The truly ruinous aspect of this news is that they, as some of the smartest guys in the room, have lost control of their derivatives trading.

As every aspiring muppet-master knows, JPM has the largest derivatives portfolio of any US bank — an astounding $78 trillion as of June 2011 (as in $78,000,000,000,000.)  This represents a startling 663 times their Tier 1 capital, meaning a miniscule 0.15% move in the value of their derivatives portfolio would wipe out all Tier 1 capital [see: The Wipeout Ratio.]

Needless to say, the Plunge Protection Team has been mobilized.  In yesterday’s conference call, Jamie Dimon as much as admits that the worst is yet to come:
“Net income in Corporate likely will be more volatile in future periods than it has been in the past.”
It’s as clear as the worry lines on Blythe Masters’ face that they have no idea how ugly this might get [read: much, much worse.]  And, if this guy — the Prince of Wall Street — has such tenuous control on the goings-on in his Chief Investment Office, what are we to think about the rest of his $78 trillion in derivatives?  How about the other $630 trillion held by other bankers? [see: City of Dreams]

The world, Chico, and everything in it...
In one of Bernanke’s first televised post-fed meeting press conferences, Dimon joined in the Q&A, bashing Bernanke for the litany of regulations and reforms that were preventing the financial community from recovering from the financial crisis.  Needless to say, there was no mention made of his role leadership in creating the crisis. Click on Dimon to watch the exchange.

This is analogous to bailing your kid out of jail, only to have him complain about how long the drive home is taking.  I was impressed by Bernanke’s restraint as he provided a thoughtful response, while no doubt thinking: “I save your sorry ass, and this is the thanks I get!?”

There’s an old adage in banking: if I owe you $100 and can’t repay it, I’m in trouble; if I owe you $1 million and can’t repay it, you’re in trouble.  While the TARP loans have long since been repaid, Wall Street’s survival is still very much in the hands of its enablers — the Fed.

As the guy ostensibly at the controls, Bernanke must feel more than a little perturbed that things aren’t going according to plan.  I wonder if Vic Perrin’s words ran through his mind yesterday as listened to the JPM call.  I wonder, as he called Dimon to lay down the law (“no, really, I mean it this time — no more bailouts!”) whether he heard those familiar words from the other end of the line…
“There is nothing wrong with Wall Street.  Do not attempt to adjust the picture.  We are controlling transmission….”

1 comment:

  1.  re: $1.2
    trillion in assets and $112 billion in Tier 1 capital.

    I did accounting, and I'm sure JPM have very little 'real assets', and as for the Tier 1 Capital, much of that will be lies also.

    The banking system is of course a fractional/ponzi pyramid. The whole thing is built on a lie, and only exists due to ignorance of the majority, and the complicity of the 0.001% elite, who must laugh themselves to sleep everynight at how clever they are.

    The Bernanke can't let JPM fail, its would be a system killer.

    Its really that simple. At some point, the Bernanke may need to issue a credit line for as much as 1.5 quad-drillion. Either that..or one morning everything stops.