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What If JP Morgan Crashes and Burns?

 


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For all the talk of the government acting to help the financial markets, there is no doubt things are bad. The media loves to focus on the banks that are failing, but what happens when a bank that has been buying failed banks goes down in flames? JP Morgan just might be that bank.

The Federal Reserve Bank has taken a very active role in dealing with the current economic problems. Why? It recognizes that a big factor in the Great Depression was the lack of involvement by the government. By refusing to put capital into the market, things spiraled out of control quickly and were not really repaired until the economic stimulus provided by the war effort in World War II.

A studier of history, Chairman Ben Bernanke has turned the sleepy Federal Reserve Bank into a whirling dervish. The bank has taken more public action in the last two years than it probably has in 50. One of the tactics it pursues is to swipe up failing banks and flip them to stronger banks. This helps damper any possible run on the banks by customers who are concerned their money will be lost. The strategy has worked well as we've seen almost know runs on any banks. The question, of course, becomes what happens if these stronger banks also start to fail?

I've banked at Washington Mutual for years. Obviously, it crashed and burned in this economy. I worried a bit, but not too much because JP Morgan came in and took it over. JP Morgan is a huge financial institution and one can feel fairly certain that it is going to come out the other side of this mess not only alive, but doing well with a bigger market share. Well, that was the plan at least.

JP Morgan is now following a familiar trend. Its stock price is heading downwards to lows not seen in a very long time. The reason? The bank is holding billions in bad debt and the economic downturn is causing concerns the bad debt figures may explode as otherwise solid loans begin to fail as well. This cyclical problem is being faced by other banks as well. In response, JP Morgan is eliminating 10 percent of its work force.

All of this raises a simple question. What happens if the pillars of the financial market fail as well? Who will be left standing? The $700 billion dollar bailout is more or less like spitting on a forest fire - it really isn't going to do a lot. Don't believe me? The Feds have already stuffed $150 billion in AIG in an effort to keep it afloat. AIG is huge, but it is only one of many companies in serious trouble.

The economic crisis has been one of the worst we've seen in a long time. We can only hope the worst is over, but all indications are the opposite is true. If the big banks the Federal Reserve is relying on start going under, the total collapse of the financial markets will no longer be just a very remote probability.

Stephen Teak is with CommercialLoanStop.com - providing commercial hard money loans even during the credit crisis.

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