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| Re: JP Morgan Chase Execs Vaporize $2B (942087) | |||
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Re: JP Morgan Chase Execs Vaporize $2B |
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Posted by Stephen Bauman on Wed May 16 12:58:39 2012, in response to Re: JP Morgan Chase Execs Vaporize $2B, posted by Charles G on Mon May 14 17:24:39 2012. When I buy protection for my portfolio, I look at how much exposure my firm already has to the firm I am buying from -- if it is beyond certain thresholds (based on the type of risk and protection being purchased), I have to buy from someone else -- even if that means paying a higher price.Let's say firm A was the low bidder but because of your risk thresholds you chose firm B. Let's further assume that firm B does not want to assume all the risk from your firm, so it sold part of the contract to firm C. Likewise, firm C sells part of the contract to firm D, etc. Eventually, firm Z sells part of the contract to firm A because unlike your firm its threshold has not been exceeded. Let's further assume that a black swan is sighted. Firm A goes bankrupt. This in turn forces firms, Z, Y, X,.., C and B into bankruptcy. Your firm will not collect from firm B because firm A went bankrupt even thought you avoided placing a contract with it. This is in essence systemic risk. Lehman was firm A and AIG was firm B. |
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