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Ominously, this relatively small equity capital balance is supporting a crushing inverted derivatives pyramid weighing a colossal $30,434b! $30,434b of notional value derivatives controlled by JPM divided by its shareholders� equity of $42.735b (note this is a decimal-point in the equity number, NOT a comma as in the derivatives number) yields a simply unfathomable implied leverage of derivatives to equity of 712 times! �Holy cow!� as they say in the American Midwest.
Also provocatively, it is exceedingly interesting to note that derivatives exposures of this magnitude have never before weathered the violent and unpredictable financial storms of mighty secular bear markets. Derivatives essentially began growing in significance in the 1970s and 1980s, and every investor knows that the greatest bull market in US history ran from 1982-2000 (see �Century of the Dow�). How will the massive inverted derivatives pyramids fare in brutal and unforgiving bear market environments? Only time will tell.
As I wrote back in the original Monster essay, I am still just as flabbergasted today that big institutional investors, who have a sacred fiduciary duty to zealously protect the hard-earned capital entrusted to them by their precious clients, would risk their clients� scarce capital by investing in JPM, not just a Dow 30 superbank but the biggest inverted derivatives pyramid in world history!
A �bank� with $712 of derivatives exposure for every $1 in stockholders� capital, in my humble opinion, is no longer a bank but a de-facto hedge fund.