The story that JP Morgan is telling us: They had about $15 billion in distressed European debt. Europe has been in trouble, so those investments were losing value. Their story, which does not make sense, is that they decided to hedge this position with a derivative of a derivative. In this case, it was an index of credit default swaps, which is the form of derivative that blew up AIG. JP Morgan's story is that instead of offsetting the risk, the hedge increased the losses dramatically. They woke up one morning, and they had a $2 billion loss.
Why it does not make sense: If you have distressed European debt, you are supposed to have already reserved against the losses in it. So why hedge the position at all? Just sell it. Get rid of these incredibly risky assets before they can suffer any additional losses. If you already have losses, it is not necessary to recognize a loss, because you have already reserved for it. So, you should not have had to hedge, period
Jamie Dimon on Meet the Press: We support getting rid of "too big to fail." ...[We] support "too big to fail." We want the government to be able to take down a big bank like JPMorgan, and it can be done. We think Dodd-Frank, which we supported parts of, gave the FDIC the authority to take down a big bank, and when it happens, I believe compensation should be clawed back, the board should be fired, the equity should be wiped out, and the bank should be dismantled, and the name should be buried in disgrace. That’s what I believe. We need to put that back in the system, and we’ll work with the regulators to try to get that back in the system.
The threat of "too big to fail" to democracy: Having banks this big destroys democracy, because these giant institutions have so much political power.
On Dimon's integrity in making such a statement: The statement is completely disingenuous because JPMorgan in fact opposes all efforts to get rid of "too big to fail."
Link to video and full transcript at democracynow.org
Link to video and concise notes at capitalismwithoutfailure.com