The Real Issue on J.P. Morgan

I have seen quite a bit of heat generated on the J.P. Morgan multi-billion dollar trading loss.   It is almost like the media wants to cover it without ever reporting on the core issue.    The core issue here is that J.P. Morgan appears to be gambling with financial instruments while claiming the transactions are on their regular banking side (backed by the FDIC and the taxpayers) rather than their investment bank side (not supposed to be backed by the taxpayers, at least pre-bailouts).

JPM claims they were only using the hedging to protect their asset pool, not generate revenues.  For example, if they had 10 billion dollars worth of mortgage backed securities on their books, they might take out a hedge (sort of like an insurance policy) that would pay them a certain amount if an excessive number of those instruments did not perform.

If that was the way they used them, they could have been telling the truth.   They would just be insuring against their assets' possible loss of value.   Of course, they should be hedging with capital reserves, not these pseudo-insurance policies with significant counter party risk.   But the main thing is, that does not appear to be how JPM was playing these hedges.   It looks like they were using them to try and make money.   In other words, they would bet on the failure of stuff they did not even own, or bet on the success of something that they did own.

 It looks like they were trying a gigantic version of a very simple trick.  If you keep betting "double or nothing" long enough, you are bound to win.   The trick is having a near infinite pool of money so that you can keep doubling down until you win, then walk away.   Of course this is just gambling.   It adds nothing real to the economy and takes no special talent.  Yet because JPM put these things on the commercial side instead of the investment banking side, the taxpayers are on the hook for the losses.

Our entire high-finance system is based on fraud.   Investment banks and regular banks should be strictly separated, just as they were before the repeal of Glass-Stegal.     The big banks are gambling.    If they win, they keep the money.   If they lose, they pass it on to the taxpayers through various means.   We don't yet realize how broke we are, because all the bad bets they have been using for "collateral" for loans at the Fed are still on the books as having value far in excess of their true value. 

Fraud is an interesting crime because for a while both the criminal and the victim think they have the money.   Right now, the American people think they have the money, in the form of the securities that the banks have been dumping on the Federal Reserve (with their collusion because they are controlled by the big five banks).  It is going to be a financial shock when the truth comes out.