JP Morgan Shrewdly Positions for Higher Rates, Weakness in Student Loans

April 19, 2012


The business model of banks has some unattractive features. Banks borrow short and lend long; meaning, banks hold depositor money that is assumed to be liquid and called at any time, then banks lend out the money for longer periods to fund illiquid projects.  This creates a maturity mismatch, or “rollover risk,” on top of the risk that the loans will not be paid back. 

Banks are encouraged forced permitted to lend out a ridiculous multiple of their assets, enabled by the Federal Reserve. The FDIC, Treasury, and Federal Reserve backstop the loans, creating an unsolvable moral hazard: banks can take big gambles, then if they lose, one or more of the government entities will levy a real tax or inflation tax to make the banks whole.

However, we’re all exposed to counter party risk, so we must choose who to conduct our business with, and Jamie Dimon proves why he’s arguably the best banker on the planet.

Many have discussed the massive student loan bubble. JP Morgan must sense something amiss, since they recently announced they will stop providing private student loans to non-customers.

JP Morgan must see the bubble in U.S. Government debt as well. Per John Carney, “we know that JPMorgan is positioning itself to benefit from rising rates. That directional bet is spelled out in its 10-K."

Carney adds: “the position taken in the CDX market by Burno Iskil, the so-called London Whale of JPMorgan’s chief investment office, could be an overlay hedge attempt to raise yields on Treasury Inflation Protected Securities, or TIPS.”

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