Masters said bank portfolios were feeling a considerable amount of pain due to widespread ratings deteriorations, sudden liquidity crises, abnormally high default rates combined with lower-than-expected recovery rates – particularly on telco debt, and outsized exposures due to fallen angels, or as Masters termed them, “falling knives”.
JP Morgan warned of weak third-quarter results in mid-September, and admitted that plans to reduce credit risk concentrations in the firm’s loan book had been overtaken by market events (See: JP Morgan Chase concedes failure in loan hedging programme). The results outlook prompted rating agency Standard & Poor’s to downgrade the bank by one notch, a move mirrored by rival agency Moody’s on Wednesday, which downgraded JP Morgan Chase’s long-term rating from Aa3 to A1.
Masters said the overall growth of the credit derivatives market had played a significant role in helping the bank to hedge its exposures, but added that the poor development of the US high-yield credit default swaps market has created severe difficulties in hedging high-yield exposures.
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