The facts bode ill for the health of the US financial system ...

So ... JPMorgan is among the lucky companies to kick off earnings season this week. If they disappoint, chances are their financial health is actually even worse than they report. If they beat, chances are their financial health isn't nearly what they say it is.

That's the nature of our blessed financial institutions. The banks have the clout to bend the rules; they have the money to find the loopholes; they have the political connections to keep from failing.


Fact #1: JPMorgan recently revised their notorious Chief Investment Office trading loss - instead of losing $2 billion they are expected to report a loss of closer to $6 billion (potentially as high as $9 billion.)

Fact #2: Barclay's has recently come under fire (and has now lost its Chairman and CEO) due to the criminal investigation revealing the bank helped to manipulate Libor rates as far back as 2005.

Fact #3: JPMorgan has been subpoenaed twice in the second quarter after being probed by the Federal Energy Regulatory Commission over JPM's manipulation of business arrangements with power companies.

Fact #4: Morgan Stanley, as a recent lawsuit reveals, pressured ratings agencies to issue false ratings on $23 billion worth of subprime mortgages back in 2006.

Fact #5: JPMorgan was recently found to have neglected the best interests of their customers in favor of their own interests, selling them JPMorgan mutual funds even if there was a better alternative available.  

Fact #6: JPMorgan recently revealed a substantial surge in its 1Q12 Value-at-Risk (the likelihood of it losing a predetermined amount on any given day should something go wrong.) That predetermined amount shot up while other major financial institutions saw their VaR decline, suggesting that banks "legally" hiding their true financial exposure could come under severe pressure if global credit market contagion hits the value of their investment books.

While funny business among international banking institutions doesn't come as a surprise to those who pay any attention at all, these facts all help to remove the veil that could be covering up more potential corruption and deception.

Basically, these guys are desperate.

Naturally, European banks are under intense pressure amidst a Sovereign debt crisis and zone-wide recession. But US banks are still looked at as relatively solid. Certainly there won't be a credit crisis here in the US, right?


Contagion could sweep quickly across the Atlantic and roil many of our too-big-to-fail (read: too-connected-to-let-fail) institutions. US banks' derivatives exposure to European banks et al, while "officially" showing slight improvement based on recent disclosures, is still massive and at levels comparable to the 2008 credit crunch.

Really - nothing has changed. Actually, it may be worse ...

These major global banks were graciously given bailout money to keep the financial system functional when markets seized up in 2008. And all the quantitative easing and twisting efforts from global central banks has been the cover that let these banks look stable and disguise their vulnerabilities.

But their lifeline of central bank funds may be drying up.

A recent report from the Bank for International Settlements (BIS) recently concluded that protracted and unorthodox monetary policy has concealed the underlying balance sheet problems -- public and private. Further, it is now likely that additional policy stimulus will do more harm than good.

In other words: expectations of monetary stimulus, ad infinitum, have created a disincentive for banks and governments to address the problems of financialization and debt.

Wish we could say we are surprised.

Not only must banks find ways to inflate the value of their assets and understate their risks as the US economy muddles through, but they also must hold their breath and hope European officials can ring-fence their banking system insolvency and somehow stem the contraction in Eurozone economies.

And then they have to hope the Federal Reserve and its foreign counterparts keep the spigots open.

The last time there was this much unfounded hope was in 2008, remember?

The pain comes when change comes.

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