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Originally Posted by steve911
JPM was attempting to hedge some of their corporate banking risk - they lend to THOUSANDS of companies world wide and proper risk management dictates that they take steps to mitiigage some of that risk. Clearly the hedge didn't work quite the way they thought it would.
While $2BN isn't a small number, it needs to be looked at in the context of the size of the overall enterprise.
Further, politicians claiming that this loss now justifies further regulation to protect the taxpayer and the financial system is just plain hooey. If the regulators/regulations were so good, how come the government's stress tests didn't pick up on the hedge as a problem. Politicians don't have a clue and regulators even less so.
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When one has a position in a financial market they are said to be long that position to hedge or protect the downside from that "long" position you seek out some other instrument or play that puts you "short" in proportion to your original "long".
As an example I am a corn farmer I have many acres of corn growing outback. To hedge my "long" position - I own corn - protecting me from lower prices when the corn is ready for harvest and sale I would use the commodity futures market to sell some corn futures. Now I have created a "short" corn position to hedge or protect my original"long" position. So, simplistically, if "long" you hedge by getting an offetting "short" position; if short you hedge by getting an offsetting "long" position.
What JPM did was have a very long position and THEN they INCREASED the risk by getting even longer so sure were they that they were right. IDIOTS gambling with OPM because they don't believe a downside exists for them. The next bailout from the left teat is there for the asking if they "ef" up.
It is a shame this schyte is so complex that it exceeds most peoples ability to grasp and therefore discuss but trust me when I tell you this stuff has to stop this is 100 times more threatening to the average taxpaying citizen than who gets elected in November. Oh BTW way the number is now estimated to be 4 billion and the meter is still clicking upward!