Bear Stearns just
imploded under a mountain of debt. It goes to show that when a firm is leveraged
34:1, even a small loss in the underlying assets can wipe out the entire capital
position.
So, how do you
feel knowing that JPMorgan Chase, the company that took over Bear, is leveraged
74:1? Does that inspire confidence in the financial system?
JPM has $74 in
derivatives contracts on its books for every $1 the bank has in capital. These
financial instruments are so complex that Fed Chair Ben Bernanke recently needed
a face-to-face refresher course from hedge fund managers. Buffett calls
derivatives ?financial weapons of mass destruction?.
And
according to the Comptroller of the Currency Report, JPMorgan has $91 trillion
worth on its books. Yes, you read that right... $91
TRILLION.
Let me put that
into perspective...
-
The entire
annual U.S. gross domestic product is about $15 trillion
-
The entire
world?s GDP is approximately $50 trillion
-
Total value of
the world's real estate is roughly $75 trillion
Derivatives used
to be for hedging only... a way to offset risk. But leave it to Wall Street.
They have now been turned into a lucrative source of fees and investment gains,
ballooning from $100 trillion to more than $500 TRILLION in just the last FIVE
years.
If you think
the subprime mortgage mess has caused turmoil, you don?t even want to consider
what will happen when just a sliver of the derivatives market begins to
unravel.