Jamie Dimon, CEO of JPMorgan Chase, known as the 'King of Wall Street,' has warned that global financial market leverage has reached an all-time high. He noted that hidden borrowings in prime brokerage, hedge funds, ETFs, and Treasury arbitrage could trigger volatility across the market at any moment.
While he did not definitively state that this would lead to a collapse similar to the 2008 financial crisis, his acknowledgment that "the numbers are high" serves as a late diagnosis for those who have witnessed the rollercoaster ride of the South Korean stock market over the past two months.
South Korea has already observed the unfolding of this warning in real-time. Just two months after the introduction of single-stock leverage, the KOSPI index experienced the highest number of circuit breakers ever triggered, significant declines, and extreme rebounds of over 17% in a single day.
The term that has repeatedly surfaced throughout this process is leverage. Analysts both domestically and internationally have pointed out that the decline in the index, despite not having poor earnings, was largely due to the mechanical liquidation of leveraged trades, including single-stock leverage.
Before Dimon's warning, Bloomberg News highlighted that "Korea is becoming an unsuitable investment country like China," referencing the KOSPI's volatility and the controversy surrounding the introduction of single-stock leverage. While there may be questions about the accuracy of the loss data for leveraged investors cited by Bloomberg, the core issue is the warning about the uncertainty in the South Korean stock market due to excessive leverage. Bloomberg's report also indicated a loss of market confidence in policies during this process.
The problem lies in the response of policymakers to such warnings. A senior official at the Blue House described the cause of stock market volatility as the "dynamic investment characteristics of individual investors," which drew backlash. While it is true that a high proportion of individual trading contributes to volatility, it was the policies that allowed these individuals easy access to leveraged products that created the issue. Following Bloomberg's report, financial authorities countered by stating that "the South Korean stock market is solid," issuing rebuttal materials. This has led to perceptions that the government, which participated as a 'player' during the market boom, is now shirking responsibility during the downturn.
As the saying goes, "A good medicine tastes bitter." While there are elements to filter out from the messages of Bloomberg and Dimon, there are certainly lessons to be learned. Leverage amplifies profits in rising markets but also inflates losses and volatility in declining markets. No policymaker should be unaware of this simple principle. The essence of the current debate is why such risks were allowed to proliferate in the market without sufficient safeguards.
Therefore, rather than responding with "the data is incorrect," policymakers should have asked themselves, "Why are such criticisms emerging?" Is it not natural for concerns to arise about a South Korean stock market that has triggered circuit breakers at an unprecedented rate? In such a situation, does it make sense to assert that 'despite external criticisms, the K-stock market is healthy'?
Ultimately, both Dimon's warning and Bloomberg's observations converge on one point: do not ignore the risks of leverage. Additionally, maintain a constant awareness that leverage can escalate into a systemic crisis at any time. This warning should not be taken lightly. This is the attitude that policymakers should uphold now.
* This article has been translated by AI.
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