If the best of breed can lose $2 billion on a single trade, then it raises the spectre that the too big to fail banks did not learn their lesson from the 2008 meltdown.
First, that Jamie Dimon did not see it coming and white-weashed the trading weeks ago, underscores JP Morgan is an 800 pound gorilla that cannot be 100% safe from terrible errors.
Second, it’s another wake-up call that derivatives– especially credit default swaps– are “financial weapons of mass destruction,” as Warren Buffett put it some years ago in his pithy much-quoted comment.
Third, it’s a terrible warning system about the potential recklessness involved in 6 banks being responsible for 90% of all credit default trades. Wall Street is an oligopoly; it is a too concentrated industry– meaning that the severe losses of one giant institution can spread to the other giants, with whom ALL its trades are done.
JP Morgan’s counterparties– Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, must be holding emergency meeting with their risk control operations and their financial officers to reckon what risks could hit them.
We still don’t know precisely the makeup of these transactions; there are different stories out there. Until we know if JP Morgan went long some synthetic CDS index or derivative contract involving European mortgages( which would be a bit of insanity), we won’t be able to judge the severity of the stupidity and estimate what the fallout could be on markets.
Suffice it to say; if JP Morgan can lose $2 billion– that might become $3 billion, or even more– then supervision of trading positions is lax, the risk control boys were asleep, and the notion that JP Morgan was the bank to buy, the king of Wall Street, is challenged but good.
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