Professor Elam

Friday May 11, 2012

JP Morgan has reported a $ 2 Billion Loss in its Derivative Trading program. The stock is down 6%. This has a feel of that Bear Stearns moment in 2008. This is not on that scale of course, JPM can stand it but, is there more to come?

Recall that Charles and Nikhal did their case in the graduate ethics class on derivatives. Citi is traing for only $3 on a pre split basis. Are we headed to another 2008 type difficulty?

Jesse's Cafe Americain has some good links on this strory. In April JPM CEO  Jamie Dimon was complainingthat regulations curbed JPM's profitability.  JPM's Blythe Masters claims to own the derivatives market, apparently not. As Jesse says, the rest of the market may be scaared of them but for their ability to blow up rather than record profits. 

A proper derivative 'hedge' has puts or calls in place to protect from an unexpected move. A 'bookie' never bets on one horse or football team. Rather the bookie collects bets on both sides so that he is covered no matter who wins. Clearly Blythe Masters did not understand that concept.