Ever wonder why getting a $200,000 mortgage in Kansas is so tough? Because that is not where the biggest banks make their big money.
Yesterday's news from JP Morgan Chase of a $2 billion trading loss makes clear how banks - those still too big to fail - make their real money.
The story of this $100 billion dollar bet by a shadowy trading operation gone "egregiously" wrong, in the words of the firm's CEO, sounds very 2007/08.
A small unit of JP Morgan virtually no one knows called CIO was placing huge derivative bets. These enormous bets were at twice the risk the company said they were just a few weeks ago. (How very AIG-like.)
The London-based JP Morgan trader implicated in this is nicknamed "The Whale" or "Voldemort" from Harry Potter. The group he runs had $350 billion of securities as of the end of last year, according to the Wall Street Journal. That's nearly twice the market cap of the bank itself, the largest in the U.S. "Voldemort" reportedly made $100 million last year.
A few weeks ago his division's bets caused such concern that The Wall Street Journal had the story on its front page, noting how the trades were making the debt market nervous. In reaction, CEO Jamie Dimon said the worries were a "tempest in a teapot."
This gets back to the topic no one wants to talk about, and possibly no one understands. Synthetic derivatives - Credit Default Swaps. There is a $700 trillion derivatives market, that is 10x larger than the GDP of the planet earth. How is such a large market possible? Just like "Voldemort" did not have the $100 billion he bet with, there is no actual money to back this $700 trillion market.
No one we have spoken to over the years has explained how this is possible.
Which gets us back to where we began… JP Morgan has unlimited access to virtually free money from the Fed… They could loan it out to the middle class (of course they do some of that) but they can take that free money and make huge, incomprehensible bets in the hopes of huge profits - multimillion dollar bonuses and if it's all just a house of cards, it's ok because they are too big to fail.