Submitted by Scott Baker, Mar 18, 2008 10:46

Glass-Steagall should never have been repealed. Doing that essentially put the banks into the leverage and speculation business, not only obliterating their role as safe havens of investment, but also making them direct competitors to margin players like Bear Sterns. No wonder the banks didn't want to lend them more money; they are in margin themselves. Mr. Kudlow needs to read the U.S. Comptroller's report on the total amount of derivatives held by all U.S. institutions. I thi8nk he will be shocked to find it is 192 TRILLION. JP Morgans share? A whopping 97 Trillion - that's right, JP Morgan, which has onle 1.2 Trillion in Assets, according to the same report, has 53% of the entire derivatives market itself, or about 80 times the amount it has in assets. Sure, most of these may not go wrong, but even if they bet wrong with 2 Trillion dollars worth, JP Morgan will be wiped out. This is obviously far more than the Fed, or anyone, can absorb. Most likely, JP Morgan will not be able to pay, and since the derivatives markets are almost entirely unregulated, counter-party lawsuits would be inevitable. Buying Bear Sterns was extremely cheap insurance, especially when you consider that CDOs, Credit Default Swaps, etc. are among the exotic derivatives listed in the report that JP Morgan is betting on. No wonder the Fed was eager to back this deal. No wonder JP Morgan was first in line to make it. No wonder Bear Sterns was pressured to take the deal and shut up.

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