A review by Boudewijn Wegerif
Two of the largest commercial banks in the U.S., indeed the world, J.P. Morgan and Chase Manhattan merged some months back to form a superbank, J.P.Morgan Chase and Co., or JPM for short. It is beginning to look as though JPM may have been formed to play the derivatives markets more forcibly, and especially the gold and the interest rate derivatives markets, and that it is now riding for a spectacular fall.
For an easy to follow understanding of the nature of derivatives, an account of the big derivatives wipe-outs of the 1990s and the extent to which the folk at JPM are up to the eyeballs in digitised derivatives, I strongly recommend the newly posted essay by market analyst Adam Hamilton at www.zealllc.com (or at www.gold-eagle.com editorials, or the Kiki Table at www.lemetrepolecafe.com).
In ‘The JPM Derivatives Monster´ Adam Hamilton reveals that the illegal gold price suppression, which has been exposed by the Gold Anti-Trust Action Committee GATA, is not just about upholding a grossly over-valued dollar; it also appears to be part of a game play by which massive derivatives interest rate speculations are deemed to be made ‘risk free´.
Hamilton sources an essay by the litigate Reginald Howe in the HOWE vs BIS anti-trust action. In the essay, about which more later, Howe shows that U.S. Treasury Secretary Lawrence Summers, by his own writings, was well aware of John Maynard Keynes´ ‘Gibson´s Paradox´.
According to ‘Gibson´s Paradox´, there is a ìrock-solid inverse relationship between gold and real interest rates in a free market”. And Lawrence Summers, during his time at the Treasury Department, from 1995 to 1999, will in all likelihood have encouraged a strong belief in ‘Gibson´s Paradox´ at J.P. Morgan, Chase Manhattan, Goldman Sachs, et al.
So strong has been the belief in ‘Gibson´s Paradox´, a handful of commercial and investment banks are now owing the equivalent of over several years of gold production ? that is, gold which they have borrowed from the central banks of the world mainly to keep the price of gold suppressed. The suggestion is that they have continued borrowing, selling and recycling the gold loans to underpin interest rate and currency derivatives speculations of unimaginable magnitude.
JPM´s SUPER-COLOSSAL DERIVATIVES POSITION
It is very hard to believe that the total notional derivatives positions of U.S. commercial banks and trusts is $43.9 trillion dollars. That figure does not include investment banks like Goldman Sachs, which do not have to supply figures to the OCC Office of the Comptroller of the Currency, a bureau of the US Treasury. The total U.S. derivatives position could be over $80 trillion, and according to some estimates, the total world derivatives position is now well over $150 trillion.
Whichever of these figures you choose for comparison purposes, you will agree, I am sure, that JPM´s control of $26.3 trillion worth of derivatives in notional terms has to be read as super-colossal!
To underscore the comparisons, just one trillion dollars is about equal to $3,700 per every man, woman and child in the U.S. The sum total of all recorded, money measured economic activity in the U.S. is a little over $10 trillion, and in the world around $40 trillion. The market value of the 500 best and biggest companies in the United States, the S&P 500, is now around $10 trillion, and the total U.S. debt is now well over $18 trillion.
Adam Hamilton explains in very easy to read terms in his essay ‘The JPM Derivatives Monster´, how we are to understand the ‘notional value´ of a derivatives contract. The notional value or ‘notional amount´ is not the amount of money that changes hands in a derivatives transaction. It is ìa quasi-fictional number that illustrates how much capital a given derivative effectively controls,” and it is used to calculate the actual payments that must be made.
WHAT IS AT STAKE?
How much has JPM put on the line, so to speak, to cover a derivatives position by which it effectively controls ‘capital´ of $26.3 trillion? I should think just about every asset it possesses, including the silver cutlery in the directors´ dining room. For $26.3 trillion ($26,376 billion to be more precise) represents $621 for every single dollar of JPM´s $42 billion equity balance, and $43 for every dollar of its mainly loan assets.
Leverage of that order is mind-boggling even for already boggled minds.
You may recall how the derivatives debacle of one rogue trader, Nick Leeson, brought down the 223 year-old Barings Bank in 1995. The capital of Barings was not $42 billion, but 28 times less at under $1.5 billion; and the notional value of Nick Leeson´s failed derivatives bets, that the Japanese Nikkei index would rise by a few percentage points, was not $26,376 billion but a comparatively paltry .09 percent of that, at about $21 billion!
Adam Hamilton explains how Howe quotes a 1988 academic paper from the Journal of Political Economy co-written by President Bill Clinton’s future third Secretary of the Treasury, Lawrence Summers. “Among other things, Mr. Howe discusses Mr. Summers’ interpretation of an observation by the famous economist John Maynard Keynes on the behavior of gold prices and real interest rates. Lord Keynes called the relationship ‘Gibson’s Paradox´.”
For Hamilton, Howe’s ‘Gibson’s Paradox Revisited´ essay triggered a solid understanding of Michael Bolser’s shrewd earlier hypothesis on JPM’s enormous interest rate derivatives exposure! ìGibson’s Paradox helped to reconcile the puzzle and answer nagging questions about JPM’s gargantuan interest rate derivatives position and how it could relate to the active management of the price of gold.” Hamilton set down his conclusion in an essay ‘Real Rates and Gold´, posted at www.zealllc.com.
In ‘The JPM Derivatives Monster´ Hamilton writes: ìGibson’s Paradox, defined by Lord Keynes, effectively claims that under a fixed gold price regime real interest rates remain predictable. If JPM top management was participating in any US efforts to cap gold, they had full knowledge that a de facto fixed gold price regime had been stealthily established and they would have had a carte blanche to massively balloon potentially highly lucrative interest rate derivatives exposure.
After all, if JPM was convinced gold was under control, and that gold prices were a prime driver of real interest rates, then what better time to become the king of the interest rate derivates world than when gold was being quietly hammered down through massive sales of official sector gold from Western central banks’ coffers?”
SO THERE YOU HAVE IT, IN BRIEF
Would Keynes turn in his grave, I wonder, if he realised how belief in his ‘Gibson´s Paradox´ has turned a supposedly safe conservative blue-chip elite Wall Street bank into a hyper-leveraged mega hedge fund with over 600 times implied leverage on stockholders’ equity? ìAnd what do the shareholders themselves think about it?” asks Hamilton. ìDo they understand how dangerous large derivatives positions have proven historically for other companies?”
JPM currently has something like 2,700 large institutional shareholders who hold almost 61 percent of its common stock. Hamilton asks: ìDo the managers of these mutual funds and pension funds understand that JPM management has built the biggest most highly-leveraged derivatives pyramid in the history of the world per US government OCC reports? Do fund managers understand the inherent risks in leveraging capital hundreds of times over?”
Having once suffered the gambling virus, I can vouchsafe that one´s understanding of risks diminishes in inverse proportion to how well one is doing when winning and how certain one is that one has finally found the right formula for breaking the house. I also had a daddy to cover my losses.
It seems that the gambling virus has hit hard at JPM. The inevitable downfall, when it comes, will be spectacular, to say the least. Who is going to cover those losses?
Read More at: What Matters , Rumor Mill