JPM Derivatives Monster Crashes

Zeal Intelligence ^ | 7/26/02 | Adam Hamilton

[blam]

"or are you suggesting that Citibank could eventually declare "bank holiday" and not be able to pay its depositors? "

I wasn't sure what was going on so, I withdrew enough money for a month's worth of expenses. (Just to be safe)

[Torie]

I hope that the class action lawyers pick their bones clean.

Actually, the SEC has first dibs. The class action lawyers are just there for the ride.

[meenie]

It is common knowledge that all derivatives are not reported in bank disclosures. Doesn't this place them in the same category as Enron in misleading the public? Delving further into the seamy side of banking, do banks attempt to educate the public on the fraudulent practices of the Federal Reserve and mislead the public on what their money really is?

[Torie]

do banks attempt to educate the public on the fraudulent practices of the Federal Reserve and mislead the public on what their money really is?

Move to strike as off topic and tin foil.

[Washington-Husky]

Blam, if I really don't like what a bank is doing, I'll remove all of my funds from their evil clutches (all fourteen dollars and 63 cents....).

No, but seriously, I think you did the right thing.

[tcostell]

Well I can always appreciate an informed opinion even if I don't agree. I guess we're all going to find out eventually.

[Nam Vet]

'Bout 20 years ago I was a SMALL joint founder of a small regional bank. I think they have 3 branches now. Anyway, they are being bought out by a larger bank and I have to decide whether to take cash or stocks or a combo. Of course there is a 15% or so premium to take stock. The symbol is FCBP and if any of you pros could peek at it and give me some honest input in today's market jitters re banks, I would truely appreciate. Thanks in advance,

Nam Vet

[arete]

produced by the socialist party.

Just as I thought . . . anyone not willing to be fleeced by big banks and a corrupt financial system just has to be a socialist. All those Enron, Global Crossing and WorldCom investors and employees who went down with the financial ship in order to enrich Ken Lay, Bernie Ebbers, and the Wall Street bankers were truly patriotic Americans.

Richard W.

[blam]

"No, but seriously, I think you did the right thing."

I was/am confident that whatever happens that it will eventually be straightened out (FDIC and all), I just could not be without funds until it was.

[Soren]

Your posts are interesting, particularly since you have first hand experience at JPM. How is counter party risk factored into their risk mgt strategy? The financial system is under a fair bit of stress. Doesn't JPM's strategy fall apart if some of the counter parties they rely on to balance their positions default? Given that JPM has such an enormous derivative book, it seems like it wouldn't take a very high default rate by counter parties to wipe out their equity.

Also, can you think of any reason why there are so many rumors floating around about $20 as a critical stock price threshold and why it appears to have been vigorously defended?

Finally, what are your thoughts regarding JPM's enormous short position in gold? TIA

[Aaron_A]

bump for later reading

[tcostell]

First of all, I'm assuming that you are not the author, just someone who is posting this article to provide info for freepers.

If you're posting the article to scare people, and to them make a buck from their panic, you should be ashamed of yourself. If you aren't then you should ignore my statements because I don't mean them to apply to you. I'm not omniscient, and I don't claim to be. If you disagree with my assessment of the situation that's fine. I don't let your opinion keep me awake at night, and you shouldn't hold mine in any higher regard.

Sometimes people acting in good faith disagree. I accept it, and I think you should too. But I don't think the author wrote this article in good faith. I think he had an axe to grind, and he played it fast and loose with the truth. Read an article written by Thomas Sowell, and then an article on the same subject written by Ann Coulter. They will probably have the same general position, and I suspect, one that we would both agree with. But while Thomas Sowell's article will have the ring of truth, Ann's will be designed not as much to expose the truth, but to win an argument.

Nothing wrong with that, but we should be able to recognize the difference. The author of this article was more like the latter, the only difference is I don;t agree with it. It's an obvious hit piece.

If you posted it in good faith and disagree with me, fine. If you did it to scare people into making you money somehow, I think it's shameful.

Also, I'm not selling anything, or excusing anything that turns out to have been illegal activity. I simply think that we should all wait till the actual verdict is in before we convict anyone. I know that can be a radical idea (especially on the left) but it seems the right thing to me.

[tcostell]

Actually, JPMorgan was an early leader in the concept of credit-risk risk management, which is the better part of what you refer to as counter party risk.

You might have heard of a "credit default swap" in your reading on the Enron case. Since JP was a leader in this market as well, I'm sure that they have used them to hedge themselves against any undue credit exposure.

I don't know anything about a $20 level for the stock, but I would be VERY surprised to discover that the level of the stock was maintained with JPMorgan assets. Rumors are rumors. If there was a "vigorous defense" as you call it, it will probably turn out to be a result of some fundamental issue like book value of assets or something. (truth is I don't really know, so don't go on my opinion)

As for their short gold position (is that the position they have on now?) Since gold is generally viewed as a hedge against inflation, and inflation doesn't look terribly likely right now, I'd say that if they do in fact have a short gold position on, then it would be because they do not anticipate additional inflation. (nor does anyone else with any economic experience)

If it's a good trade or bad trade, I can't say because I know nothing about it.

But no-one should take my word on the markets. They should read up on the work of people who do not have an interest in selling something to them. When you want info on a used car, you ask consumer reports, not a used car salesman. You should all do the same with the markets. And that includes the market for gold.

[bvw]

In the highest pressure areas -- unimaginably high pressure -- of the diamond making appartus is a mixture of very hard brittle tooling and some stuff we encounter everyday and consider to be very soft and flexible (and its not the diamond-forming graphite I am talking about). The whole idea in diamond making tooling is to spread out the incredible pressures evenly, and even the pressure field derivatives must be as even as possible -- all while also providing for at the very center, something that is going to "move" -- the growing diamond crystals.

If there is any dislocation, and mismatch, any miscalculation of some tooled angle, and cheap material or missed step in the hardening process -- ka-booom! The whole appartus radically, explosively deconstructs itself.

Fortunatley in diamind making the physics and engineering is pertty well-known. While it pushes into the materials-knowledge unknown realms of metal plasticity and is difficult to instrument, compared to the physics of human cmpetition and financial derivations, it is a cakewalk.

In the derivatives markets there are, I think, I suspect, a number of background or subtle dynamic effects that have never quite been factored in, because the dynamic modeling of financial systems is always done around some localalized regime of current conditions.

In otherwords, as Dirac suspected about gravity's big G -- hard "constants" assumed of dynamic modeling can change.

You simply can not be risk neutral to those.

[tcostell]

I think the analogy is kind of a reach, but if it works for you, great.

[bvw]

Perhaps, still there are some analogies between the achieving streams of income from tiny fees and interest against massively leveraged conglomerations of instruments and funds and diamond making.

[arete]

. . . I'm assuming that you are not the author, just someone who is posting this article to provide info for freepers. If you're posting the article to scare people . . .

No, I'm not the author and I'm not trying to scare people. For me this is all about exposing the thieves and liars on Wall Street and hopefully bringing them to justice. I personally didn't lose a bunch of money in the stock market or even hold Enron, WorldCom, JPM or Citi stock. I do have a tremendous amount of empathy for those people who were "conned and cleaned" out of their savings and retirements. That, I believe is a crime and I would like nothing more than to see ALL those responsible for such an outrage to be punished to the fullest extent.

You can call it a mission or an obsession. That is okay. People's lives have been made more difficult and in many cases ruined beyond repair by a few arrogant and selfish others who lack ethics and character. To them, the average investor is a sheep to be sheared and is treated with almost comtempt by Wall Street bankers and brokers. JPM could have declined Enron's business simply on the grounds that it appeared unethical or at least close enough to fraud to warrent a rejection of the twisted logic necessary to present a defense of the arrangements now. Remember, JPM knowingly and actively participated in helping Enron "beautify" their reports. In other words, fix the numbers to make them look good. Where do they draw the line?

Here is one of my other posts so that you know that I am not just picking on JPM but everyone involved in the frauds perpetrated on investors:

An emblem of excess

Richard W.

[tcostell]

For me this is all about exposing the thieves and liars on Wall Street and hopefully bringing them to justice.

Do you mean to imply that to work on Wall street is to be a thief and a liar? If not, then you might want to wait until someone is actually convicted of something.

[arete]

The Schwab commercials are much closer to the truth than many like to admit. Most on Wall Street are are "salesmen" pushing "products." Just what were Blodgett and Grubman doing anyway?

As far as convictions go, nothing will happen unless there is public pressure.

You must have heard the one banker's (JPM or Citi) response to a senator's question -- "It depends on your definition of deception." Remind you of anything? Those guys are so out of touch and so self-absorbed that they think that they write the rules and can do whatever they like. After Bubba tried to convice everyone that sex wasn't really sex, I guess that I'm not too surprised when I hear the self-interested bankers try to tell us that fraud isn't really fraud. "Are you going to believe us or your lying eyes?" Jail those responsible.

Richard W.

[razorback-bert]

When you want info on a used car, you ask consumer reports, not a used car salesman.

If you want to know the truth about used cars, ask a used car salesman, they deal in the cars and really know which one are dogs. CR was way off base on electronics while I was in the business, they didn't have access to my service logs to know which brands came in for repair or warranty work the most.

My point is the used car salesman got their bad name not because of what they knew or how well they did their job, but because of their ethics, same as pols, lawyers and brokers.

JPM has been hurting themselves with their weasel wording defense (it's not our job) and used car sales tactics (this will fly past the SEC).

I am not a gold bug, just someone who has to deal often with large arrogant multinational companies, whose personnel are convinced they are the brightest and best and are told that they are from college (best natuarally) on. I have watched them do some really stupid things for the best of (their rationalized) reasons and when the real world intrudes upon their plans, people get hurt.

From where I sit on the sidelines, JPM and C look to have fallen into this hubris trap.