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Will JPMorgan Chase's $9 Billion Whale Land in Taxpayers' Laps?

Amanda Alix
July 1, 2012

As the losses mount from JPMorgan Chase's (NYSE: JPM  ) trade-gone-bad, Jamie Dimon has been clear that the bank will not be permanently injured, and that taxpayers will not be expected to step in to clean up the mess. Besides the notion that the too-big-to-fail banks laugh in the face of risk, secure in the knowledge that they will never really go under, there is another reason for his statement. It seems that those dicey derivatives were not marking time in the investment unit of the bank, but were stashed in the retail, FDIC-backed portion.

A recent article by The Nation author William Greider points out that JPMorgan stores its risky derivatives in a FDIC-backed subsidiary, which could ostensibly leave taxpayers in charge of refunding losses. This is rather old news, but bears repeating as Dimon wears himself out repeating that this trading mess will have no impact on taxpayers.

Other big banks hold derivatives in subsidiaries, too
The last time this issue received such an airing was when Bank of America (NYSE: BAC  ) announced last fall that it was moving the bulk of its derivatives business acquired from its purchase of Merrill Lynch from the bank holding section to the commercial side of the street. At the time, the total value of derivatives held by BAC was nearly $75 trillion, with $53 trillion of that amount already residing within FDIC insured territory. In what was obviously not its first transfer, more -- or possibly, all -- of the remaining derivative pile was scooted over to its insured subsidiary.

B of A was reamed by the media at the time, and the FDIC wasn't especially happy about the move, either. The Federal Reserve, however, thought the transfer was just peachy, as it would take some pressure off the bank holding company -- which had just suffered a rating downgrade, hence the transfer to a safer, better-rated haven. To be fair, Bank of America was not alone in this type of activity; at that time, almost the entirety of JPMorgan's derivative portfolio valued at $79 trillion was housed in is retail subsidiary.

At this point, according to Greider, B of A's derivative grand total sheltered in its subsidiary stands at about $47 trillion, while JPMorgan's is around $72 trillion. Citigroup (NYSE: C  ) shelters almost all of its $53 trillion as well, and Goldman Sachs (NYSE: GS  ) holds $44 trillion in a retail subsidiary of its own. Morgan Stanley (NYSE: MS