“Yesterday the Federal Reserve released a 19-page letter that it and the FDIC had issued to Jamie Dimon, the Chairman and CEO of JPMorgan Chase, on April 12 as a result of its failure to present a credible plan for winding itself down if the bank failed. The letter carried frightening passages and large blocks of redacted material in critical areas, instilling in any careful reader a sense of panic about the U.S. financial system. The Federal regulators didn’t say JPMorgan could pose a threat to its shareholders or Wall Street or the markets. It said the potential threat was to “the financial stability of the United States.”
[My emphasis: JPMorgan has about 51 trillion dollars worth of derivatives,which means that in a major financial downturn, somebody is going to have bet wrong, and owe somebody else trillions of dollars that they can’t pay. Because all major financial institutions are interconnected in a vast network of bets, they can only pay out on their own wrong bets if someone else (counterparties) pay up to them on their good bets. If anyone of size goes under, everyone else won’t get what they’re owed, but will still owe others, so everyone else could be insolvent, having trillions of dollars in derivatives that they can’t pay, leading to a financial gridlock of dysfunction within hours.]
“It’s important to parse the phrasing of that sentence. The Federal regulators didn’t say JPMorgan could pose a threat to its shareholders or Wall Street or the markets. It said the potential threat was to “the financial stability of the United States.”
“How could one bank, even one as big and global as JPMorgan Chase, bring down the whole financial stability of the United States? Because, as the U.S. Treasury’s Office of Financial Research (OFR) has explained in detail and plotted in pictures (see below), five big banks in the U.S. have high contagion risk to each other. Which bank poses the highest contagion risk? JPMorgan Chase.
The OFR study was authored by Meraj Allahrakha, Paul Glasserman, and H. Peyton Young, who found the following:
“…the default of a bank with a higher connectivity index would have a greater impact on the rest of the banking system because its shortfall would spill over onto other financial institutions, creating a cascade that could lead to further defaults. High leverage, measured as the ratio of total assets to Tier 1 capital, tends to be associated with high financial connectivity and many of the largest institutions are high on both dimensions…The larger the bank, the greater the potential spillover if it defaults; the higher its leverage, the more prone it is to default under stress; and the greater its connectivity index, the greater is the share of the default that cascades onto the banking system. The product of these three factors provides an overall measure of the contagion risk that the bank poses for the financial system.”
[ I still say financial collapse, limited nuclear war, martial law, dictatorship, and no elections are the path America is on for 2016. Read Antichrist 2016-2019 if interested in my reasons.]