Cycle Pro updates:Current Commentary -- Where Are We Now?
(Sunday March 23, 2008 PM): A quick note... apparently Bear Stearns derivative portfolio notional value was 13.4 Trillion as of last weekend. J.P.Morgan's was $83.9 Trillion as of Q3'2007. Taking on Bear Stearns derivative portfolio means JPM could now sport a portfolio in excess of $97 Trillion (however, I am sure JPM & BSC have a portion of inter-counterparty trades that will essentially net out when the portfolios are combined). Nonetheless, anything over 1 trillion is a huge number, but anything approaching 100 trillion is so large that should never be allowed to be concentrated with one company.
If it was JP Morgan that was about to go belly up last weekend instead of BSC, who would have been able to step up to help bail them out? The Bernanke script suggests it would have been almost entirely upon the Fed... which translates to you and me... and our children, and their children. Do the math: experts claim that average derivative trading portfolios are really "at risk" for about 2% of the notional value. 2% of $100 trillion is $2 trillion. If that ends up being JPM's loss in this, then we as individuals will end up paying for it by amortizing this loss over many years of US budget deficts. If Bernanke chooses to print his way out of any bailout, then the inflationary tax will be a permanent scar and reminder of this foolishness. Bear Stearns was not too big to fail, but JP Morgan is. The precident has been established. We should all be very worried.