Photo: Fox Business News
Everyone’s still trying to figure out exactly how JP Morgan lost $2 billion in a hedge/trade gone wrong.To a lesser extent, people are asking why.
Michael Pento of Pento Portfolio Strategies tries to explain why in an interview with King World News:
I blame the Fed, like I do for much of the world’s ailments. The Fed buys a bond from JP Morgan, yielding say 2% on the 10-Year, and then they expect the bank, JP Morgan, to accept 25 basis points from the Federal Reserve. Now, they have to beat earnings by a penny, so what do they do?
Instead of allowing the 25 basis points to be given to them by the Federal Reserve, they go out and buy distressed European debt, and they hedge it by buying a CDS (credit default swap). Then the hedge blows up and they report a loss. So, once again, the Fed and the banks are to blame.
It’s been no secret that low interest rates and a flat yield curve have made it difficult for banks to make a decent return on their assets. This is apparent in low net interest margins.
In order to book higher returns, one has to take higher risks.
Pento argues that the banks could be effectively regulated by returning to the gold standar, not by introducing more regulations.
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