Making sense of the banking industry…the sequel
“These were egregious mistakes. They were self-inflicted and this is not how we want to run a business.”
The losses occurred in one of JP Morgan’s investment groups. The same group is expected to lose another $800 million this quarter. From the article:
The trading group has been a focus in recent weeks as questions surfaced about big bets the JPMorgan unit was reportedly making in credit default swaps.
and also from Dimon…
“Every bank has a major portfolio. In those portfolios you make investments that you think are wise to offset your exposures,” Mr. Dimon said in the April call. “At the end of the day, that is our job — is to invest that portfolio wisely, intelligently over a long period of time to earn income and to offset other exposures that we have.”
I completely understand that you need to offset exposure, but please note his words…”wisely” and “intelligently”. Something tells me that these investments…these credit default swaps were not a wise investment. If you want the layman’s version of a credit default swap you can look at this article. The definition from investopedia states it well:
A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default.