Make Banking Boring
By JOE NOCERA, The New York Times
Published: May 14, 2012
Let’s begin by stipulating the obvious: nobody outside of JPMorgan Chase knows for sure what really happened with those trades that have cost it so much money and done such severe damage to its once stellar reputation.
You know Joe, it’s really not very hard to understand at all.
JP Morgan invested a ton of money, and by a ton I mean Trillions of exposure, in an obscure and lightly traded piece of paper labeled CDX NA IG 9 that represents a notional basket of 125 European stocks.
What do I mean by “notional”? Well, there’s not actually a pile of stock certificates lying around that you can use to wrap fish or wipe your ass or wallpaper your living room, these stocks are “synthetic” meaning that if anyone ever needs to see one you have to go down to the store and buy it at whatever the market price is.
But there is always a price and a market- or is there?
As the Hunt brothers found out in the early ’80s with a far more tangible and useful (you can use it to make photographic film and it has excellent electrical conductivity) asset, you can assemble a position that so dominates a market that you can’t sell without lowering the price which is high because of your artificially created scarcity.
Supply increases in the face of fixed Demand and the price goes down. Real Economics 101 stuff, not hard to understand at all.
Now the problem with CDX NA IG 9 is you can’t use it to make spoons or candlesticks. Heck, as I pointed out before you can’t even use it to wipe your ass because it doesn’t exist.
So its value is entirely dependent on finding another sucker investor who’s willing to give you something for nothing.
Good luck with that.
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