I have worked for several Wall Street firms over the years. Each one tries to differentiate itself from its competitors, but essentially they operate in the same fashion. Each firm’s inventory is so complex that no one could understand it. Since people are naturally optimistic, analysts will take a look at a firm’s assets and liabilities and assign the best case scenario.
These facts lead to the two points I wish to make. First, whatever you think the losses from these instruments are, they are probably much worse. Whenever there is a market issue (Subprime securities, ARS, money market funds, imited partnerships, among others), the issue turns out to be a huge degree of magnitude worse than anyone ever imagined. Do you remember Citi, Merrill Lynch and AIG continuously upping the amount of their losses during the financial crisis?
Second, if JPM has these types of issues with its balance sheet, other firms have them, too. Due to ongoing financial repression, investment yields are low in virtually every type of instrument. The bank’s job is to make money, so it is naturally pursuing yield wherever it thinks it is. This yield-chasing is leading the banks to take on riskier and riskier bets. This is not just a JPM problem, but a problem throughout the entire financial system. Wait and see. Other banks will come forward with similar positions. One bank will have gotten lucky and avoided the whole business, and that bank will become the best run bank on the street.