JPMorgan and the Prophecy of the Next Financial Crisis

JPM championed two financial innovations that led to global financial crises. Will there be a third with crypto and JPM Coin?

Lance Ng
Lance Ng
Feb 25, 2019 · 11 min read
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Source: Flickr

Calling yourself ‘long-term’ doesn’t mean you’ll last…

In August 1998, the Russian government announced it was devaluing their currency and defaulting on their government bonds. The financial market panic that followed led to the collapse of a giant hedge fund called ‘Long-Term Capital Management’ (LTCM), which had about US$125 billion in assets.

Of swans and bubbles

LTCM was founded by luminaries from investment banks and the academic world of financial mathematics. Their sheer credibility led to few questioning their methods for risk management.

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A normal distribution assumes most outcomes cluster around the average value. Source: Wikimedia Commons

JPMorgan, VaR and RiskMetrics

The VaR method grew to prominence and acceptance as the industry standard for risk management in the 90’s. Although the theoretical underpinnings were first proposed by academics long ago, the key advocate and leader of the modern VaR methodology was JPM.

No income? That’s great, here’s a house

“The crisis was the worst U.S. economic disaster since the Great Depression. In the United States, the stock market plummeted, wiping out nearly $8 trillion in value between late 2007 and 2009. Unemployment climbed, peaking at 10 percent in October 2009. Americans lost $9.8 trillion in wealth as their home values plummeted and their retirement accounts vaporized.”

— “A guide to the financial crisis — 10 years later”, The Washington Post, September 10, 2018

The credit crisis begun in 2007. Real estate markets across the US had started falling as a housing bubble begun to deflate. The bubble was due to the proliferation of ‘sub-prime loans’ in the years before.

The ‘magic’ of large numbers and small probabilities… yet again

In 1997, a particularly bright woman by the name of Blythe Masters created a ‘broad index secured trust offering’, or ‘Bistro’, in short. It was an investment structure that combined an off balance sheet investment vehicle with credit derivatives, which made it possible to “remove risk from companies’ balance sheets”.

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Blythe Masters, former CFO of JPMorgan. Source: Wikimedia Commons

The only financial institution that made a profit during the crisis

So where was JPM before, during and after this crisis?

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Jamie Dimon, CEO of JPMorgan. Source: Flickr

JPM Coin…three times ‘lucky’?

In February 2019, JPM announced that it was creating a digital coin call JPM Coin to facilitate “instantaneous transfers of payments between institutional accounts”.

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