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Derivatives Drain
-- September 18, 2002

J.P. Morgan Chase's derivatives are valued at an incredible $25.9 trillion -- more than any other bank in the U.S. In fact, according to data reported to the Office of the Comptroller of the Currency (OCC), the combined worth of the derivatives held by the other 24 banks in the list of the top 25 banks with derivatives equals $23.9 trillion -- $2 trillion less than J.P. Morgan Chase!

That may sounds like an impressive portfolio, but, during volatile times like these, derivatives are a disaster waiting to happen. In effect, J.P. Morgan has placed bets on its shareholders' assets. Now, we know that they are intelligent, well-thought-out bets based on the most sophisticated models available. But they are still bets. And J.P. Morgan is leveraged to the hilt!

If anything should go wrong, J.P. Morgan Chase could be in very serious trouble. Just look at what happened in 1998 with Long-Term Capital Management -- a hedge fund run by the best brains in the business. When Russia defaulted on its loans, it caused a chain of events that bankrupted LTCM.

Bottom line: Derivatives are a risky business. And things could get worse for J.P. Morgan very quickly.

related article: J.P. Morgan Shares Plunge as Telecom Strategy Fails