According to Jim Leonard, CFA, Morningstar's senior bank credit analyst, "In the financial sector, what we've learned over the past few years is that where there is smoke, there is not a fire, there's a raging inferno!"
J.P. Morgan's (ticker: JPM, rating: A) surprise announcement Thursday shocked the credit markets with the extent of its losses tied to a hedging/trading position in the CDX indexes. Bloomberg and The Wall Street Journal first reported a dislocation in the index credit default swap market several weeks ago. J.P. Morgan was identified as the player causing the divergence between market trading prices and theoretically appropriate levels. However, the markets had no concept of the size of the risk that J.P. Morgan had undertaken.