Why The JPM Trade Matters

Posted 2012-05-11 10:05
by Karl Denninger
in Banking System

We've all heard about the JP Morgan "rogue" trade by now -- the "hedge" that was not really a hedge.

But what's not been discussed are two aspects of this -- that this is a "slow burn" sort of story, and second, how it came to happen in the first place.

Let's deal with the first -- the "whale" trade was first reported in April. It "simmered" until it blew up into a huge mess yesterday.

The problem is the position is still on and now everyone knows that JP Morgan has this position and it's going against them. Expect people to press into this.

But the real problem is found in how the bank got this position on and funded it in the first place. That's a problem.

There is no solution to this issue found in the current paradigm for banking. As I have often put forward the only fix is to enforce a "One Dollar of Capital" standard for all banks that want to do business in the United States, demanding that any institution with banking exposure here adhere to this rule.

We continue to see example after example that even after 2008 there is no regulatory supervision that matters over these firms. The only way to prevent bad behavior such as this is to make it unlawful and enforce the posting of the bank's capital against all unbacked positions, without exception.

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