Insight: JPMorgan bets sent false signals to wider debt market
By Carrick Mollenkamp and Cezary Podkul
Reuters
June 14, 2012
NEW YORK (Reuters) – JPMorgan Chase & Co’s disastrous bets on corporate debt may have caused unexpected collateral damage: erratic behavior in a barometer that measures the financial health of blue-chip U.S. companies.
Those bets used Wall Street derivatives called credit default swaps. They are supposed to act like homeowners insurance, allowing bondholders, banks and hedge funds to buy protection against declines in the value of corporate debt, and ultimately protection against a default.
In this case, though, they became more like the pawns in a battle between JPMorgan and hedge funds on the other side of its bet. This struggle so dominated a corner of the market that it sent false negative signals about the credit quality of some major companies whose underlying finances were largely unchanged, market experts said.
