What are the implications of this mayhem? They are all bad, especially for Mortgage Backed Securities (MBS), Credit Default Swaps (CDSes) and other collateralized debt obligation (CDO) derivatives. The band of fools in JPMorgan's Chief Investment Office (CIO) were buying up CDOs at the same time wiser heads in the banking world were avoiding them like proverbial hot potatoes. It is noteworthy that most of these derivatives were purchased after the 2008 credit crisis. In the greedy eyes of the JP Morgan derivatives trading staff, buying this paper after it had taken a 20% haircut appeared to be a bargain . To compound their problems, not only they take on CDS contracts, but they created additional hedges around those derivatives. This is like taking a bet on a bet. What idiots. There is lots of conjecture about what was really going on in Morgan's CIO. Was it all a hedge on inflation that went awry, because deflation lingered longer than expected? It may be weeks before the cognoscenti speak and we learn the full story. But one thing is certain: There is a fine line between hedging and proprietary ("prop") trading, and the CIO appears to have crossed the line. And their hedges were big enough that they shifted the landscape of the entire CDS market. (They have hundreds of billions of dollars in derivative contracts in play at any given time. The counterparty risk is huge .) The world of derivatives is a wilderness of mirrors. There are far