Tuesday, October 15, 2013

JPMorgan Chase Will Bail Out Your Grandma For Uncle Sam

JPMorgan Chase announced that it will make good on its banking clients' Social Security and other benefit payments in the event Uncle Sam decides to turn deadbeat.  I did a double take when I heard that on NPR this morning, and I read the article to be sure I hadn't misunderstood something.  I can draw one of two implications.  Scenario number one is that JPM is supremely confident that its cash horde will withstand a one-time delay of government payments and it won't get hit with any more SEC fines or forced settlements.  The alternative is that JPM knows something no one else could know about whether it has its own backstop from the US government.

Such an guarantee is very unusual from a SIFI.  Most investors are nonchalant about hedging the possibility of a US default on its shorter termed Treasury obligations.  It sure looks like financial advisors and even portfolio managers haven't explored hedging with hard assets or futures contracts on non-US currencies.  Central banks are making appropriate preparations but the mention of increasing dollar swap lines makes me LOL.  If people panic and sell Treasuries the first thing they'll do is get rid of US dollar proceeds as fast as possible.  Central bank dollar swaps are just as likely to amplify a run on the dollar as mitigate it.

It's too late for your grandma to open a bank account at Chase to seize on this sweet deal.  The next few days will reveal whether one was necessary to bail her out.