I don’t fully understand how or what exactly happened to lose JPMC billions…
In: Economics
Basically you can trade loans depending which way the interest rate moves you can make money or lose money depending if you were buying or selling at the time. They made massive trades and they got it wrong.
“The City” is basically gambling. There are a few straightforward investments made, but also a lot of straight gambles on whether a share price will rise or dip, or all kind of other fancy indexes. No kidding, it’s straight up gambling. These guys lost, and whilst chasing their losses there was nobody saying “stop!”
The simple version is a trader inside JPM was able to take advantage of lax oversight procedures within the bank as well as several human errors by people who were supposed to be watching the bank’s risk, and made a huge investment in credit default swaps that went bad.
Credit default swaps are somewhere between an insurance contract and a naked gamble:
If a company owes you money, and you are worried they might go broke and not pay you, you can buy a credit default swap from a bank. This means you will pay a small premium every month to the bank, and in return, the bank promises to pay you if the company that owes you defaults on its debt to you. In this way, its like insurance
However, I can go that bank and also buy a credit default swap, meaning I pay a little to the bank every month, and if the company that owes you money doesn’t pay you, I also get a big payout from the bank, even though that company didn’t owe me anything. I was just making a bet that your debtor would default.
The London Whale sold billions of dollars worth of these credit default swaps, which worked out fine so long as they were just collecting the monthly payments for a profit. But then credit markets changed, and they began to look like they would have to pay out and would lose money. The London Whale essentially doubled-down in an effort to support the prices for the credit default swaps, thinking he could ride out a temporary downturn in the market. This didn’t work out, and the bank lost billions on the position.
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