The MF Global Blow Up & State of the global financial system

[kevsta]

Rehypothecation strikes again.

http://www.winnipegfreepress.com/bus...137439933.html

Quote:

TORONTO - One of Canada's investment regulators has accused Barret Capital Management, a firm specialized in futures and options on metals and other exchange-traded commodities, of using client money for its own purposes.
The Investment Industry Regulatory Organization of Canada warned Monday that Barret clients are at risk due to the firm's "ongoing misappropriation of their money to fund losing trades and ongoing misinformation about the value and holdings in their accounts."

their broker is https://www.laurentianbank.ca/

[kevsta]

http://online.wsj.com/article/SB1000...034430488.html

Quote:

Nearly three months after MF Global Holdings Ltd. collapsed, officials hunting for an estimated $1.2 billion in missing customer money increasingly believe that much of it might never be recovered, according to people familiar with the investigation.

As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation.

"gone, all gone.. move along.. "

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I AGREE

[kevsta]

I think it's time to revive this thread.

Originally Posted by kevsta

Lots of people still have no idea how bad this is. Europe is terminally broken, and is going to "Lehmanize" the rest of the world again, and its looking like quite soon now.

This will not be difficult IMO, as actually nothing has been fixed in the US system since last time round.

from my favourite "blog" JPM derivatives [prop] trade blows up

Quote:

A month ago we warned that JPM's CIO office is nothing short of the world's largest prop trading desk. Not only were we right, but what just transpired is just shy of our worst possible prediction.

Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done

JPMorgan who have 11% of the world's $707 trillion derivatives, and 44x derivatives leverage to assets have an open-ended losing trade on.

$2 billion could be "Tip of the Iceberg" - http://www.bloomberg.com/video/92465009/

Quote:

Reporter "One of the assets you're buying is European mortgage bonds, how is that hedging anything? that's just an investment? "

Dimon: "Yes that's right, we take this money, we have excess reserves, and we invest where we think we can make a safe return"

quote of the interview:

Quote:

Anchor: "If anybody knows risk management, it's Jamie Dimon"

and IMO if JPM have been doing this, there will be other many banks doing similar things yet to come.

[Puppycow]

Any chance this could be another Lehman in the making?

[kevsta]

Originally Posted by Puppycow

Any chance this could be another Lehman in the making?

I don't think so directly, although I do think the ultimate losses will be many multiples of what they have declared thus far.

JPM have (on the surface at least) a fairly strong balance sheet and as much taxpayer backup as they could ever need, although who knows what could theoretically happen with $80 trillion of potential contagion in opaque swaps & derivatives.

it concerns me more that if his can happen to 'best of breed' JPM "risk managers" what are the current market stresses doing to the mostly hidden shadow banking system, parts of which are undoubtedly involved in similar activities.

[sam84]

saw an interview with jamie diamon saying they'd hold the trades as long as it took and were prepared to ride the volatility (saddle up tax payers)

[kevsta]

http://money.cnn.com/2012/05/18/mark...loss/index.htm

Quote:

By Maureen Farrell @CNNMoneyInvest May 20, 2012: 8:50 PM ET

NEW YORK (CNNMoney) -- One thing seems clear about JPMorgan Chase's $2 billion loss. It's no longer $2 billion. It's likely much higher.

The number being bandied about now is closer to a range of $6 billion to $7 billion, according to several people working on trading desks that specialize in the derivatives JPMorgan Chase (JPM, Fortune 500) used to make its trades and from two sources with knowledge of the bank's positions.

It's clear from public data filed with The Depository Trust & Clearing Corporation that JPMorgan Chase hasn't sold any of its positions yet. The DTCC tracks trading activity and sizes of positions on the IG9 and other indexes, and there haven't been any big moves since last week.

"Whatever the size was, it's clearly not something that you can call one or two dealers and sell," said Garth Friesen, a co-chief investment officer at AVM, a derivatives hedge fund that's not involved in these trades.

As soon as it becomes clear that JPMorgan Chase is unwinding its position, it will be obvious to players on every major trading desk. Hedge funds will immediately start piling into that index and buying protection, driving up the bank's losses.

Until then, it won't cost the hedge funds much to sit and wait.

"There will be a stare-fest between the hedge funds and JPMorgan," said James Rickards, former general counsel at Long-Term Capital Management, a hedge fund that required a $3.6 billion bailout from the Federal Reserve because of its massive losses from its trading activities.

"It will cost JPMorgan an unimaginable fortune to push the spread back in their direction," he added.

[kevsta]

things not shaping up well for JPM, speculation of losses ranging between $8 billion (up to $100 billion in further interest rate derivatives blowup from some of the conspiracy-minded out there) necessitating the need to sell $25 billion of successful positions

Quote:

"They really made two stupid decisions," said Lynn Turner, a consultant and former chief accountant of the Securities and Exchange Commission. The first was taking risks with derivatives that they did not understand, Turner said.

"The second is selling assets with high income that they can't replace," Turner added. In a low interest-rate environment, the bank will struggle to generate as much income with the cash it received from selling the securities, he said.

and www.forbes.com - JPM's $40 billion loss

Quote:

JPMorgan as a whale got noticed, then harpooned, not for $3 billion in paper losses, but $40 billion in market value blubber. This is an enormous comeuppance. Call it 25 percent on a market capitalization over $170 billion. The stock’s now worth $125 billion and has given up all of its 32 percent gain this year.

and now accusations of fraud involving altering CDS spread figures and distorting the whole market to show hundreds of millions profits.

http://www.zerohedge.com/news/second...-default-swaps

http://www.bloomberg.com/news/2012-0...ment-bank.html

so looks like Jim Roger's big short (JPM) is paying handsomely.

[Tippit]

Originally Posted by kevsta

things not shaping up well for JPM, speculation of losses ranging between $8 billion (up to $100 billion in further interest rate derivatives blowup from some of the conspiracy-minded out there) necessitating the need to sell $25 billion of successful positions



and www.forbes.com - JPM's $40 billion loss



and now accusations of fraud involving altering CDS spread figures and distorting the whole market to show hundreds of millions profits.

http://www.zerohedge.com/news/second...-default-swaps

http://www.bloomberg.com/news/2012-0...ment-bank.html

so looks like Jim Roger's big short (JPM) is paying handsomely.

You really have to have some cajones to short a firm which basically has an unlimited line of credit with the central counterfeiter. We've seen time and time again that JPM are among the "annointed ones" on Wall Street, so shorting them and actually winning the trade is nothing less than heroic.

[kevsta]

http://www.bloomberg.com/news/2012-0...an-crisis.html

Quote:

The euro area faces a major economic crisis, most likely a series of rolling, country-specific problems involving some combination of failing banks and sovereigns that can’t pay their debts in full.
This will culminate in systemwide stress, emergency liquidity loans from the European Central Bank and politicians from all the countries involved increasingly at one another’s throats.


Personally, I’m most worried about the balance sheets of the really big banks. For example, in recently released highlights from its so-called living will, JPMorgan Chase & Co. revealed that $50 billion in losses could hypothetically bring down the bank. (All big banks must provide their regulators with a living will to show how they could be shut down in an orderly fashion if near default.)

JPMorgan’s total balance sheet is valued, under U.S. accounting standards, at about $2.3 trillion. But U.S. rules allow a more generous netting of derivatives -- offsetting long with short positions between the same counterparties -- than European banks are allowed. The problem is that the netting effect can be overstated because derivatives contracts often don’t offset each other precisely. Worse, when traders smell trouble at a bank that has taken on too much risk, they tend to close out their derivatives positions quickly, leaving supposedly netted contracts exposed.

People with experience regulating or analyzing financially distressed institutions greatly prefer to measure potential losses with the European approach, in which netting is allowed only when contracts expressly incorporate settlement on a net basis under all circumstances.

When one bank defaults and its derivatives counterpart does not, the failing bank must pay many contracts at once. The counterpart, however, wouldn’t provide a matching acceleration in its payments, which would be owed under the originally agreed schedule. This discrepancy could cause a “run” on a highly leveraged bank as counterparties attempt to close out positions with suspect banks while they can. The point is that the netting shown on a bank balance sheet can paper over this dynamic. And that means the JPMorgan living will vastly understates the potential danger.

According to my calculations with John Parsons, a senior lecturer at MIT and a derivatives expert, JPMorgan’s balance sheet using the European method isn’t $2.3 trillion but closer to $4 trillion. That would make it the largest bank in the world.

What are the odds that JPMorgan would lose no more than $50 billion on assets of $4 trillion, much of which is complex derivatives, in a euro-area breakup, an event that would easily be the biggest financial crisis in world history?