April 7, 2011
Stand in front of the JP Morgan Chase Tower at 270 Park Avenue in midtown Manhattan and you’re at Ground Zero for systemic risk in the U.S. financial markets.
JP Morgan is the quintessential too-big-to-fail bank company.
But more importantly, JP Morgan is too interconnected to fail.
That’s because it is deeply enmeshed in the market that posed much of the systemic risk during the financial crisis of 2007 and 2008, the repurchase, or “repo,” market:
-JP Morgan is one of two clearing banks for the most prominent corner of the U.S. repurchase market, the so-called tri-party market, where at the time of the crisis JPM was clearing for both Bear Stearns and Lehman Brothers.In that pivotal tri-party role, JP Morgan wields one of the most powerful levers in modern finance. (Update June 23, 2017: JP Morgan Chase is giving up its role as one of the nation’s two clearing banks for the tri-party market. The other is Bank of New York Mellon.)
In 2008 JP Morgan withheld tri-party financing from Bear Stearns and Lehman Brothers, triggering their collapse – which caused the Reserve Primary money market fund to break the buck – and intensifying fears that Goldman Sachs, Merrill Lynch, Morgan Stanley and maybe even JP Morgan itself would be next. This was the seminal systemic risk most responsbile for the Federal Reserve’s dramatic intervention in the financial markets in 2008, according to Federal Reserve Chairman Ben Bernanke.
-JP Morgan itself is one of the nation’s largest repo dealers, with $222 billion in loans and $263 billion in borrowings outstanding at the end of 2010.
-JPM’s broker-dealer subsidiary, J.P. Morgan Securities LLC, is one of the 20 Primary Dealers authorized to do repos with the New York Fed.
-Money market funds and hedge funds are critical players in the repurchase market. JP Morgan has the nation’s second-largest money market fund family and the nation’s largest hedge fund group.
The JPM global bank holding company is also a leader in two other key areas of systemic risk during the crisis: Credit derivatives and securitization. Last year it had the most derivatives contracts of any U.S. bank holding company, and it was the world’s largest dealer of credit default swaps, the credit derivatives that helped fuel the housing bubble and felled insurance giant AIG. Before credit markets collapsed, JPM was the second-biggest commercial bank sponsor of asset-backed commercial paper (ABCPaper), which securitization companies sold to raise money.
Some critics find JP Morgan’s trajectory under CEO Jaime Dimon disturbing because they believe the company’s size and interconnectedness gives JP Morgan an unfair competitive advantage and will force another taxpayer bailout at the next crisis.
“Jaime Dimon clearly wants to become too big to fail, too interconnected to fail, and – above all – too global to fail,” blogged M.I.T. economist Simon Johnson.15] “This is terrific corporate strategy – and very dangerous for the rest of us.”
But Dimon said in the Washington Post he believes no company should be immune from failure, not even JP Morgan.
Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail.
I collected the following footnotes for my own use, to help me keep track of some of my online sources. I’m leaving them here in case they’re helpful to you, too. -Mary Fricker
 New York Times 6-22-10
 http://www.fcic.gov/hearings/pdfs/2010-0902-Bernanke.pdf and http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/chap2.pdf and http://www.federalreserve.gov/newsevents/speech/bernanke20080822a.htm and http://www.financialstability.gov/docs/regs/FinalReport_web.pdf and http://www.cepr.org/pubs/PolicyInsights/PolicyInsight52.pdf and JP Morgan’s 8-2-10 letter to the SEC
 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aX8D5utKFuGA and http://lehmanreport.jenner.com and “House of Cards” p. 55
 JP Morgan 10K
 Baseline Scenario blog 6-26-10