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Exclusive: Behind Market Moving JPMorgan Report

Chatter on the Street suggests JPMorgan could be the next firm to land squarely in the sights of the SEC.

According to the website Propublica, The Securities and Exchange Commission is investigating whether JPMorgan allowed a hedge fund to improperly select assets for a $1.1 billion deal.

Just how serious is the SEC investigation? We found out in an exclusive TV interview with one of the reporters behind the market moving story - Jesse Eisinger.

Nuts & Bolts

As was the case with the SEC’s investigation into Goldman the details are complex and somewhat confusing. For the sake of simplicity we boiled down events to just a few sentences.

In May of 2007, JPMorgan put together a CDO or collateralized debt obligation backed by subprime mortgages. Hedge fund Magnetar Capital had a role in selecting the securities – and then sometimes used the CDO to make bearish bets on the mortgage meltdown. At issue is whether JPMorgan adequately disclosed to the investors that Magnetar had a role in picking the securities while also betting against segments of the deal.

(That's the Readers Digest version of events. For an in-depth look at these developments click here and go to ProPublica’s report “SEC Investigating Deal Between JPMorgan and Hedge Fund Magnetar”.)

Key Things To Watch

First and foremost Eisinger tells us, these developments are not entirely unexpected. The SEC has been examining the industry for quite a while, it's just this specific case has advanced. "It's moved from an inquiry to an investigation."

But that doesn't mean investors should jump to conclusions. ”It’s way too early to say that the SEC is going to charge JPMorgan with fraud,” he explains. "There's no evidence to suggests that's the case."

Also, who had ultimate authority over the CDO is not clear. "It's possible a third part independent manager (had the authority) in which case Magnatar's hands will be completely clean," he says.

What Matters For Investors

Of course the big question for investors is whether to re-position in JPMorgan. Fast Money trader Karen Finerman doesn't think so. Although she admits the stock now faces headline risk, "I don’t find the developments that dramatic," she says. Fast Money trader Joe Terranova concurs. "It seems to me the market over-reacted," he says.

Ultimately what what should you make of these developments?

”The financial crisis is still with us,” says Eisinger. “This is an overhang for the financial stocks. We have forecloseure crisis, putbacks and CDO.

Ironically, the CDO business isn’t an area that JPMorgan had a great interest in developing. ”JPMorgan was a tiny player in the CDO business. The big players were Citi and Merrilly Lynch, Eisinger adds.

* A JPMorgan spokeswoman said Monday the bank was "cooperating fully with the inquiry."



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Trader disclosure: On Nov 1, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova owns (APA), (AAPL), (AXP), (C), (GOOG), (GS), (FCX), (IBM), (NOV), (ORCL), (PCP), (PEP), (PFE), (UPL), (VRTS), (XBI); Cortes is short (AAPL); Cortes owns (GOOG); Cortes is short (RSX); Cortes is long S&P 500; Cortes owns (K); Cortes owns (TSN); Cortes is short Euros; Cortes is short crude oil; Cortes is short gold; Cortes owns U.S. Treasuries; Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST); Finerman owns (AAPL); Fienrman’s Firm owns (APC); Finerman & Finerman’s Firm owns (BAC); Finerman & Finerman’s Firm owns (JPM); Finerman’s Firm owns (MSFT); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Finerman’s firm owns Russell 2000 puts; Weiss owns (UPS); Weiss owns (JWN); Weiss owns (HK); Weiss owns (DVN); Weiss owns (CSX); Weiss owns (COP)


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