Credit derivatives were the brainchild of savvy bankers at JPMorgan in the 1990s. Now the bank and one of Wall Street’s most controversial products are under intense scrutiny.
As JPMorgan reels from a complicated hedging strategy – one that misfired to at least $2.3bn in losses – derivatives market participants worried about new rules on trading fear it will be harder to argue for more lenient treatment.
The loss is also a reminder of the dangers of seeking bigger profits by minimising the cost of hedging. While credit derivatives were created to allow lenders to offset the threat of a default by a borrower, the product has been associated with a number of blow-ups in recent years.
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