A Potential Pothole on Rally Road

As word got out they were in trouble, traders began to press Long Term's positions, which exacerbated its troubles. The cycle continued, culminating with a run on the hedge fund and a bailout by its lenders, as brokered by the Federal Reserve.

"If Long Term Capital's $1.25 trillion derivatives book almost took down Wall Street, what do you do with a firm with $26 trillion?" Puplava wondered. "The problem in this derivative market is that everyone is trying to offload risk" rather than taking on more.

In broad terms, Puplava expressed concern that because of its lowered credit ratings, J.P. Morgan is facing increased borrowing costs, as well as the potential diminishment of revenue from its derivatives business. The combination could put further pressure on the bank's profitability, causing further downgrades and more problems with its derivatives business, and so on and so on.

Having said that, the money manager admitted having no specific knowledge of J.P. Morgan's derivatives book or alleged problems therein. "The only ones who know are J.P. Morgan and the feds," he said, criticizing Alan Greenspan for consistently speaking out against more disclosure and regulation of banks' derivatives positions. "But if they were doing something right, why have profits declined persistently? Any time there's trouble, J.P. Morgan is always on the scene. Let's hope J.P. Morgan's board is asking question Enron's should have been."

Whether or not J.P. Morgan has to pay the ultimate price for its derivative activities remains to be seen. But Wall Street is watching very closely.