Derivatives

JPMorgan doomsday scenario revealed – Financial Times

Chagrined to see that another aspect of my ‘novel’ THE FUND has surfaced in the news — the Doomsday Scenario. Here are a few sentences from my book about a fictional “Too Large To Fail” bank called W.R. Shipley & Co. which as the center of the story. The chairman of this bank, a woman named Hannah Merton, who rose through the trading side, reviewed a report while on the phone with the U.S. Treasury Secretary, Damion James:

“Her trusted lieutenants, the ‘brain trust’ had already modeled this scenario for her. They called it the ‘Doomsday Scenario’, one that could never happen because it required too many independent variables to converge.”

Unfortunately for Hannah, in my book all those independent variables DID converge, causing insurmountable derivative trading losses, that not only bring the bank down but freezes up the entire financial system. Sounds familiar, huh? By the way, in case you’re wondering, I finished the first draft of THE FUND in March 2008, and it was published by Macmillan last summer — well ahead of Bear & Lehman and now JPMC.   Here is the link to the original FT article–>  JPMorgan doomsday scenario revealed

 

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Best Explanation of Derivatives Danger Ever – thanks to Jon Stewart

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Marc Chandler on Derivatives

 

“There is lack of transparency and visibility in these products, and that increases the risk,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, a boutique banking firm in New York.

Link to original article

 

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JPMorgan Chase’s Jamie Dimon seen stumbling, per WSJ

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Investment Bank being investigated for ties to Gadhafi’s Libyan Sovereign Wealth Fund

This sounds like the plot-line for my book, The Fund, where a investment bankers will do anything to get a large bonus — even if it means turning a blind eye to required ‘know-your-client’ rules and regs.

Regulators Wonder Whether Goldman Tried to Bribe Libya | The Atlantic

By Uri Friedman Jun 09, 2011

The Wall Street Journal, building on an earlier report that Goldman Sachs lost 98 percent of Libya’s $1.3 billion investment with the firm during the credit crisis, has a new scoop today: U.S. securities regulators are exploring whether Goldman violated bribery laws while doing business with the sovereign wealth fund controlled by Muammar Qaddafi. They’re focusing primarily on a $50 million fee that Goldman offered to pay the Libyan Investment Authority as part of its effort to compensate Libya for its steep financial losses. The fee–mentioned in the second-to-last paragraph of the Journal‘s initial article–would have been passed along to an outside fund adviser run at the time by the the son-in-law of the head of Libya’s state-owned oil company.

The transaction never occurred, the Journal explains, but Goldman may have still breached the Foreign Corrupt Practices Act, which “bans U.S. companies from offering or paying bribes to foreign government officials or employees of state-owned companies,” including sovereign wealth funds. To its credit, Goldman did say it would make the payment if the deal satisfied “Foreign Corrupt Practices Act representations as set out in the Terms Letter,” according to documents reviewed by the Journal. Goldman, not surprisingly, denies any violation, and the Securities and Exchange Commission hasn’t yet launched a formal investigation. The Journal adds that other financial firms who used middlemen in their dealings with Libya could also be in trouble.

Link to original article.

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JP Morgan CEO’s Public Spat with Government Regulators

Here’s the video of JPMorgan Chase & Co. (NYSE: JPM) Chief Executive Officer Jamie Dimon asking Federal Reserve Chairman Ben S. Bernanke if the government is going too far in burdening U.S. banks with regulations and thereby leading to a slower economic recovery.  The session took place at a bankers conference in Atlanta.

 

It’s a subject underlying the fictional story of my book, The Fund, wherein a ‘Too Big To Fail’ financial institution is targeted by extremists in a Financial Terrorism plot.

 

What’s at play here?  Bank profitability on one hand and the safety of our financial system on the other.  The sane result should be somewhere in the middle: a safer and robust banking system that continues to lead the world in innovation and supports economic recovery.

 

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H.T. Narea Appeared on The Suspense Radio Show

PART 1 of 2

PART 2 of 2

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U.S. Banks Derivatives Exposure Top Heavy

According to the U.S. Treasury Department, four banks control 95% of the U.S. derivatives market as of December 31, 2010.  Click image below to view full size chart.

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Goldman Traders Tried to Manipulate Derivatives Market in ’07, Report Says

Article from Bloomberg – by Christine Harper and Joshua Gallu
Apr 13, 2011 10:09 PM ET

Goldman Sachs Group Inc. (GS) mortgage traders tried to manipulate prices of derivatives linked to subprime home loans in May 2007 for their own benefit, according to a U.S. Senate report.

Company documents show traders led by Michael J. Swenson sought to encourage a “short squeeze” by putting artificially low prices on derivatives that would gain in value as mortgage securities fell, according to the report yesterday by the Permanent Subcommittee on Investigations. The idea, abandoned after market conditions worsened, was to drive holders of such credit-default swaps to sell and help Goldman Sachs traders buy at reduced prices, according to the report.

“We began to encourage this squeeze, with plans of getting very short again,” Deeb Salem, a trader in the structured product group, said in a 2007 self-evaluation excerpted in the report. Swenson, Salem’s supervisor, sent e-mails in May 2007 urging traders to offer prices that will “cause maximum pain” and “have people totally demoralized.” In interviews with the committee, Salem and Swenson denied attempting a short squeeze, the report said.

Salem “claimed that he had wrongly worded his self- evaluation,” the report said. “He said that reading his self- evaluation as a description of an intended short squeeze put too much emphasis on ‘words.’”

The subcommittee cited the episode as an example of how Goldman Sachs traders placed the firm’s interests ahead of its clients’ as the value of mortgage-linked investments tumbled in 2007. The subcommittee, led by Senator Carl M. Levin, a Michigan Democrat and Tom Coburn, Republican of Oklahoma, has called on regulators to craft strict bans on proprietary trading and conflicts of interest to keep the problems from recurring.

‘Poor Quality Investments’

“Conflicts of interests related to proprietary investments led Goldman to conceal its adverse financial interests from potential investors, sell investors poor quality investments, and place its financial interests before those of its clients,” according to the subcommittee.

Goldman Sachs traders abandoned the short-squeeze attempt after discovering on June 7, 2007, that two Bear Stearns Cos. hedge funds that specialized in subprime-mortgage investments were collapsing. Salem e-mailed Swenson and another colleague to suggest trying to buy short positions, known as “protection,” on collateralized debt obligations, or CDOs, from hedge fund Magnetar Capital LLC, according to the subcommittee’s report.

“We need to go to magnetar and see if we can buy a bunch of cdo protection… Can tell them we have a protection buyer, who is looking to get into this trade now that spreads have tightened back in.”

‘Great Idea’

Swenson expressed “no concerns about the proposed deception” and responded to Salem that it was a “great idea,” according to the report.

The report comes almost a year after the committee spent more than 10 hours grilling Lloyd C. Blankfein, Goldman Sachs’s chairman and chief executive officer, and six current and former employees in one of the most hostile political showdowns in the aftermath of the financial crisis.

That hearing happened 12 days after the Securities and Exchange Commission sued New York-based Goldman Sachs for fraud in a case that the firm settled for $550 million in July.

In an effort to address questions raised by the SEC lawsuit and the subcommittee, Blankfein convened a committee of Goldman Sachs executives to review the firm’s practices. In January, the firm published 39 recommendations aimed at better managing conflicts and client relationships, as well as governance and employee training.

Citigroup, Merrill Lynch

Goldman Sachs disagrees with “many of the conclusions” in the report and cited the business standards committee as evidence that “we take seriously the issues explored by the subcommittee,” the firm said in a statement released by Lucas van Praag, a company spokesman.

As rivals including Citigroup Inc. (C) and Merrill Lynch & Co. posted losses on mortgage-related investments during 2007, Goldman Sachs reported record earnings that benefited from the firm’s negative view of the subprime-mortgage market.

Blankfein and other executives at the firm have said that its traders placed “short” bets, which profited when prices of mortgage-linked securities fell, to hedge against losses. He also said in last year’s hearing that Goldman Sachs was acting as a “market maker” in selling CDOs and other mortgage-backed investments to clients as the company’s own traders were betting against them.

‘Massive Short’

“We didn’t have a massive short against the housing market, and we certainly did not bet against our clients,” Blankfein, 56, who received a record $67.9 million bonus for his performance in 2007, told the subcommittee last year. “Rather, we believe that we managed our risk as our shareholders and our regulators would expect.”

The subcommittee said that documents uncovered in its two- year investigation of the financial crisis show that Goldman Sachs’s mortgage traders did have a large short position during 2007 and the sales team aggressively sought clients to buy CDOs that the traders expected would decline in value.

One executive “instructed Goldman personnel not to provide written information to investors about how Goldman was valuing” a CDO called Timberwolf, according to the report, “and its sales force offered no additional assistance to potential investors trying to evaluate the 4,500 underlying assets.”

Joshua S. Birnbaum, who ran a unit called the ABX Trading Desk, said in an October 2007 internal presentation that a short position established by the structured product group after the collapse of two Bear Stearns hedge funds was “not a hedge” against CDOs and residential mortgage-backed securities, or RMBS, owned by the firm, the report said.

‘Not a Hedge’

“By June, all retained CDO and RMBS positions were identified already hedged,” the presentation said. “In other words, the shorts were not a hedge.”

The subcommittee’s report describes four CDOs that the firm created and sold in an effort to reduce Goldman Sachs’s exposure to subprime-mortgage risk. It describes Goldman Sachs as having given misleading descriptions of some of the CDOs and in some cases seeking out buyers who were inexperienced with them.

The report also says that the mortgage desk reversed its view on how it marked derivatives values based on its position in the market. Clients with short positions complained that Goldman Sachs was undervaluing those bets during the squeeze attempt. After the traders abandoned that strategy in June 2007 and increased their wagers against the mortgage market, other clients complained the firm was overvaluing the short positions.

“Once it began buying CDS shorts, the SPG Desk immediately changed its CDS short valuations and began increasing their value,” the report said. “Clients with long positions began to complain that the marks were too high, and internal Goldman business units also raised questions.”

Link to original article

 

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