The horrifying other side of the trade

Are big banks in Europe writing debt policies they don't understand?

By Jim Cramer May 30, 2012 9:16AM

As I was finishing my morning workout, I heard something from the TV that made me shiver: Insurance costs on Italian bonds had soared virtually overnight, and the cost of insuring $10 million in bonds was now something like $500,000, above those horrendous levels of November, when Italian yields hit 7% on the 10-year.


I wasn't shuddering about the credit default swap itself. Those are silly pieces of paper. If you own Italian debt and you think it is going down in price, you should just sell it. You are being sold a bill of goods to insure it by people who do nothing but create new instruments to be able to graft you with hidden fees. Hey, that's how the game is played.


No, I shivered because I said to myself: "What if JPMorgan (JPM) is writing that insurance? What if it is writing insurance it really doesn't know anything about? What if some 42-year-old kid is writing billions in insurance on Italian bonds to some hedge fund manager who is going to start nasty rumors about Italian bankruptcy?"


Why not? I bet the pay per contract is gigantic and before New York could find out about it the salesperson would be having boat drinks in Venice with the rest of the gang. I can just see the salesperson giving himself $1 million by writing insurance on instruments he really knows nothing about but has been told he will be compensated hugely for. What if JPMorgan had already sold this kind of insurance and now it has to adjust its positions to show further losses?


Or, even worse, what happens if the trade that JPMorgan still seems to be unwinding was predicated on Italian yields going down, not up, and the Italian bond market is getting stronger not weaker?


And that's the world we live in now, a world in which a bunch of arrogant 40-year-olds decided to play hedge fund with the banks' money, disagreeing entirely with the banks' actual wise men and going long a lot of pieces of paper they thought they understood and selling lots of pieces of paper like insurance contracts on sovereign debt without any fear of consequence because, alas, the boss said they needed to maintain a presence in Italy and Spain because it is good for "business."


That's why I shuddered. Because for all I know, JPMorgan is on the other side of that Italian credit default swap and truly thinks it knows how to insure debt and lay off risk.


Now, I am sure some folks at JPMorgan have some idea of how to hedge that paper. They get trained to do that. But if someone can amass a rogue trade that can lose billions in the name of heaven knows what, can't we also assume they are in there writing debt policies they don't understand? It isn't like we heard the edict from Jamie Dimon that said "Don't insure risk you don't understand anymore."


They didn't allow arrogance, they just fired some people.


Now here's the truth. If I want to own a stock that sells insurance, I will own Travelers (TRV). It insures only risk that can be understood. If I want to own a bank that takes on risk, I want it to be lending risk to homeowners and businesses they know, not hedge funds that are probably wagering against the bank at the same time.


So permit me my shudder. If Dimon works out when I do and he heard the same report, believe me, he's shuddering, too, because in some corner of his brain, he's wondering: Is that us doing the insuring? Odds are he doesn't know, and, given how complex everything is, he may not even be able to figure out whether that's his bank on either side of the trade.


Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

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All the more reason we need to limit those big banks.   There are Trillion of US dollars in the derivative markets that are valued secretly between two or more people in excess of the GDP of every country on Earth combined!!   This is happening in every country on Earth, and we allow someone to play with them which could bring down the whole house of cards in one fell swoop.   You don't have to regulate overnight, but we do need some common sense approaches to this phenomenon.
May 30, 2012 12:49PM
You're doing nothing but reinforcing the fact that Glass-Steagall Act should be reinstated.
May 30, 2012 12:14PM
Deflationary crash is coming! The European banks stress test was an optimistic display of confidence.They are not going to stand anything close to 2008. Google for "european bank kondratieff wave" to understand the wishful thinking. Next leg down will dwarf 2008 and great depression. The greatest depression ever will change the world forever.

May 30, 2012 11:00AM
What makes me shudder while reading this is that a scant month or so ago Jim's article would be opining how it couldn't possibly be JPM on the other side of these trades because Dimon is the best bank CEO alive, and he would never allow JPM to dabble in this crap. Now, according to Jim, he doesn't know what's going on in his own trading departments, and he wouldn't understand it if he did. What a difference a month makes....  
May 30, 2012 11:48AM
Kramer, are you sayin the people on Wall Street are crooks or stupid. In a lawsuit, stupid is better.
May 30, 2012 1:39PM
to me Cramer has something here...something smells.
May 30, 2012 1:39PM
The beauty of Quantum Easing is that money only exists when it is observed.
May 30, 2012 12:05PM


gas going to 5 and oil going to 150?

when you made this call you said SLB was best of breed and the way to play it

SLB was at 80 at that time low 60's.....just ANOTHER pump and dump


May 30, 2012 12:50PM

  It's almost a certainty these major banks are headed for another debacle in the derivative market that will lead to hyperinflation rather than deflation.  When that happens you can kiss your dollar "safe haven" goodbye.  Neither the Euro nor the dollar will be a safe place to put your money when that happens;  also, the resultant inflation of dollar will lead to a huge rise in the price of everything denominated dollars like oil and commodities.  This however, assusmes that the dollar at that point will still be a international reserve currency.  Many nations have already started dumping the dollar as a reserve currency (China, and Russia for example).  So it's possible that we could end up with a hyper inflated dollar that is no longer an international reserve currency. If that happens the toilet paper in your bathroom will have about as much value as a dollar. 


   It would be a good idea to start putting your assets into something tangible instead of paper currencies ( commodities, real estate, etc).  You don't want to be in the dollar long term.

May 30, 2012 11:47AM

are big banks writing policies they don't understand?

i can't believe you wrote such an ignorant statement

big banks know the game is YOU  that doesn't get it......but you think you do ....FOOL

May 30, 2012 4:48PM
May 30, 2012 11:30AM


Banks and derivatives.  They will destroy us all.  Do you sense another AIG-style bailout coming?  Check you direct deposit slip and see if you federal income tax deduction is going up (again).



May 30, 2012 11:05AM
the scam continues....when will this guy be held accountable?
May 30, 2012 10:49AM

i work out ...i am from harvard ...i get up at 3am ... i i i i i i i i


May 30, 2012 2:39PM

unvalue guy.........70% of americans believe in capitalism?  really.....just because the majority believes something doesn't make it true...........more than 70% of the christians thought galileo was a heretic because he claimed the earth wasn't flat and revolved around the sun


more than 70% of americans are fat and broke so how is their belief working out?

May 30, 2012 12:50PM

ah .........the pain and stench of free market capitalism is in the air


gouge the masses for profit...........6 houses and 3 yachtsaren't enough


bust the unions and bring the working stiffs to their knees

May 30, 2012 2:23PM

Bobo may be right, but I think he is distracting readers from his disasterous recommendations by writing about FB, Italian bonds and such.  Hey, we know it's bad, Cramer!


And most of these pundits are crooks or close to it.  I guarantee most get paid to pump particular stocks.  The whole analyst community was shown to be a pack of liars and crooks in the last meltdown... but why aren't any of them in jail?  The reason is that the Goldman's of the world have our government by the throat and they are really who is in charge.  Otherwise there would be lots of people in jail.  The rabbit hole is much deeper than most people think.

May 30, 2012 1:14PM

I luv hearing you all bellyache, especially the socialist guy about capitalism. 70% of Americans believe in Free Enterprise and a very limited role for governement. 65% of those same Americans believe the Federal should pay for their medical care. Capitalism is dead.......we're all socialists now. 50-70% of all mortgage debt is owned by FM, we have over a trillion $ in school debt. Gee, I wonder who is on the hook for that? Of course it is the rugged individualist capitalist........year right.


By the way dodos...........we (United States) is one of the most capitalist countries in the world. Capitalism?????

Wake up!!!!!!!!!!!

May 30, 2012 10:51AM

UNVALUE GUY are you taking the cramer challenge with apple as your cramer pick?

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