It was indeed refreshing to read that JP Morgan Chase & Co (NYSE JPM) was able to reap $5 billion from over the counter derivatives markets trading in 2008, during the worst year in Wall Street history.
Some profits from interest rate swaps, municipal bond and foreign exchange have been kept confidential but let's hope we can assume the same rosy profits in these areas also.
With the collapse of Bear Stearns and Lehman Brothers, we saw fewer and fewer banks and institutions participating in the market making arena. We notice that JP Morgan Chase is active in the over the counter trading of derivatives which gives them an advantage over other traders. As market makers they are able to establish the bid and ask for various transactions and other traders must trade off these bid and ask prices.
The Office of the Comptroller of the Currency said that JP Morgan Chase dominates the OTC derivatives market with $87.7 trillion dollars worth of outstanding OTC contracts, more than twice Bank of America Corporation (NYSE BAC) and Citigroup Inc. (NYSE C) combined.
According to the OCC, the majority of J.P. Morgan's profit may have come from interest rate swaps in 2008. This is a guesstimate because the OCC doesn't report how much profit banks gain from OTC trading. To date, the Regulator has not released fourth quarter results.
It is this number of $87.7 trillion dollars that is so intriguing. When US Treasury Secretary Geithner does his "stress test," what should he be looking for that would be considered toxic assets in that number? It seems reasonable to assume that some portion of the $87.7 trillion dollars has some toxic assets in the pot somewhere. Would it be safe to say that of the $87.7 trillion dollars, that only 20% of JPM's outstanding OTC contracts are toxic? That would only be $17.54 trillion dollars. Then of course it must have the $17.54 trillion dollars in capital to cover these losses, otherwise some people may think that the bank is insolvent.
Please offer your comments.
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Reader Comments (Page 1 of 1)
3-04-2009 @ 4:37PM
Bill said...
Derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect. This activity is known as speculation. Do we want banks to speculate? Isn't speculation what has brought us "toxic debt?" It is great when you harvest a profit, but the taxpayer pay the bill when the banks make a bad investment. If the banks made their money by lending it to people and businesses, we would not have the credit problem that we know today. Without big gamblers (speculator), energy (oil) costs would become more stable and financial instiutions would not be paying executive $100M bonuses/salaries!
3-06-2009 @ 12:26PM
Beltway Greg said...
If the world were a truly just place, and of course we are all aware that it isn't, Apple would be downgrading JPM on on-going concerns and a lack of clarity in regard to balance sheet issues. And with SKF at $250 methinks the banks are pretty stressed at this point. With $87.7 trillion, for you kids playing this game at home, that's trillions with a "T" of utterly incomprehensible garbage lurking on the books
"has some toxic assets in the pot somewhere" is the understatement of the century. $87.7 trillion? They didn't need to create the bad bank; it created itself. Want to hazard a guess as to which is worth more? A warehouse full of IPhones or a balance sheet full of this crap? You can take your time figuring out he answer but Morgan can't.