Now as the overall market has worsened, it costs even more forJPMorgan Chase to sell protection against possible bankruptcies oncorporate bonds. Since JPMorgan Chase is basically the only one on its side of thebet, a worsening market makes it even more expensive to keep thisposition and more difficult to find other places to offset theselosses. JPMorgan Chase's main bet has been on an index, known as IG9, of125 U.S. investment grade companies. Shares of three of the 125companies -- retailer J.C. |
Penney ( JCP , Fortune 500 ) and insurers MBIA ( MBI ) and Radian ( RDN ) -- have taken big hits since last week, driving up the cost ofoffering protection against a default. Additionally, since Dimon's announcement, more hedge funds havepiled into the index, further driving up the cost of sellingprotection. It's clear from public data filed with The Depository Trust &Clearing Corporation that JPMorgan Chase hasn't sold any of itspositions yet. The DTCC tracks trading activity and sizes of positions on the IG9and other indexes, and there haven't been any big moves since lastweek. "Whatever the size was, it's clearly not something that youcan call one or two dealers and sell," said Garth Friesen, aco-chief investment officer at AVM, a derivatives hedge fund that'snot involved in these trades.
As soon as it becomes clear that JPMorgan Chase is unwinding itsposition, it will be obvious to players on every major tradingdesk. Hedge funds will immediately start piling into that index andbuying protection, driving up the bank's losses. Until then, it won't cost the hedge funds much to sit and wait. "There will be a stare-fest between the hedge funds andJPMorgan," said James Rickards, former general counsel atLong-Term Capital Management, a hedge fund that required a $3.6billion bailout from the Federal Reserve because of its massivelosses from its trading activities. "It will cost JPMorgan an unimaginable fortune to push thespread back in their direction," he added.
But JPMorgan Chase may blink first. It could face pressure fromU.S. government regulators to start selling some of its positions. Both the Securities and Exchange Commission and the Federal Bureau of Investigation are looking into JPMorgan's trade.
Dimon has also been called totestify before the Senate Banking Committee . The bank's shareholders may grow increasingly anxious as well,which could force JPMorgan Chase's hand. Shares are down 18% nearlysince the company announced the loss.
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