Guest Post: Amaranth Kill Shot: Collateral Damage In A 78 Trillion Dollar Derivatives Book Compliments Of JPM

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Submitted by Rob Kirby

Amaranth Kill Shot: Collateral Damage In A 78 Trillion Dollar Derivatives Book Compliments Of J.P. Morgan Chase (pdf)

purpose of this paper is to illuminate the real purpose of the obscene
size of derivatives books amongst the world’s largest financial
institutions.  Derivatives in strategic markets are controlled by governments through proxy banks and agencies using these instruments.  By sheer volume, the trading in paper “tails” wag the physical “dogs”.  When
market volatility negatively impacts these large institutions they are
given a pass by regulators and accounting protocols in the interest of
national security and preservation of the status quo.  Moreover, this ensures the perpetuation of U.S. Dollar hegemonic power.  The following accounts outline how these instruments are used to project this power.


Amaranth Advisors LLC went bankrupt in Oct. 2006.  By mid 2007 the
Committee of Homeland Security and Government Affairs released a
document containing a detailed investigation of the Amaranth scandal
entitled “Excessive Speculation in the Natural Gas Markets.”  Amaranth,
hedge fund, was launched in 2000 as a multi-strategy hedge fund, but
had by 2005-2006 generated over 80% of their profits from energy


circumstances surrounding Amaranth indicated that they were
predominantly long natural gas. This is not surprising since “very easy
money policies” by the Federal Reserve, a hot housing market along with
rapidly industrializing Asian economies had created steadily increasing
demand – and a bullish environment - for commodities in general and
energy inputs in particular.


against this inflationary backdrop, the U.S. Federal Reserve, the
Bureau of Labor Statistics, and the U.S. Treasury ALL consistently
fudged [lied about] economic data, always overstating economic growth
and employment data and perpetually understating the effects of
inflation.  This has been well documented by John Williams of


became a high profile entity employing leverage to push prices of a
high profile strategic commodity like natural gas higher.  This
put Amaranth at odds with the 2 % inflation “kool-aide” illusion that
the Fed and U.S. regulators were [and still are] trying to falsely sell
the American people.  In 2008,
Ludwig Chincarini CFA, Ph.D, penned a paper chronicling Amaranth’s collapse titled, Lessons from the Collapse of Amaranth Advisors L.L.C. linked here.  The
report gave details regarding Amaranth’s management style and risk
management practices as well as chronologically detailing the last days
of the hedge fund.


Through the research provided to us by Ludwig Chincarini CFA, Ph.D., we get an accurate picture of Amaranth’s methodology for managing risk as follows:


Chief Risk Officer of Amaranth had a goal of building a robust risk
management system. Amaranth was unusual in terms of risk management in
that it had a risk manager for each trading book that would sit with the
risk takers on the trading desk. This was believed to be more effective
at understanding and managing risk. Most of these risk officers had
advanced degrees. The risk group produced daily position and profit and
loss (P&L) information, greek sensitivites (i.e. delta, gamma, vega,
and rho), leverage reports, concentrations, premium at risk, and
industry exposures. The daily risk report also contained the following:


Daily value-at-risk (VaR) and Stress reports. The VaR contained various
confidence levels, including one standard deviation (SD) at 68% and 4
SD at 99.99% over a 20 day period. The stress reports included scenarios
of increasing credit spreads by 50%, contracting volatility by 30% over
one month and 15% for three months, 7% for six months, and 3% for
twelve months, interest rate changes of 1.1 times the current yield
curve. Each strategy was stressed separately, although they intended to
build a more general stress test that would consolidate all positions.


All long and short positions were broken down. In particular, the risk
report listed the top 5 and top 10 long and short positions.


A liquidity report that contained positions and their respective
volumes for each strategy was used to constrain the size of each
strategy. The risk managers also calculated expected losses for the
individual positions. The firm had no formal stop-losses or
concentration limits. Amaranth took several steps to ensure adequate
liquidity for their positions. These steps are listed on the more
detailed version of this section on the FMA website.”


fact, the risk aversion procedures taken by Amaranth don’t really seem
much different than the mandated risk management procedures practiced by
J.P. Morgan, B of A, Citibank, Goldman Sachs and Morgan Stanley – ALL
with derivatives books measuring from 42.1 to 78.6 Trillion at Dec.
31/10.  Here’s how the U.S. Office of the Comptroller of the Currency [OCC] states these behemoths manage their risk [pg. 8]:


control market risk in trading operations primarily by establishing
limits against potential losses. Value at Risk (VaR) is a statistical
measure that banks use to quantify the maximum
expected loss, over a specified horizon and at a certain confidence
level, in normal markets. It is important to emphasize that VaR is not
the maximum potential loss;
it provides a loss estimate at a specified confidence level. A VaR of
$50 million at 99% confidence measured over one trading day, for
example, indicates that a trading loss of greater than $50 million in
the next day on that portfolio should occur only once in every 100
trading days under normal market conditions. Since VaR does not measure
the maximum potential loss,
banks stress test trading portfolios to assess the potential for loss
beyond the VaR measure. Banks and supervisors have been working to
expand the use of stress analyses to complement the VaR risk measurement
process that is typically used when assessing a bank’s exposure to
market risk……..[more]”


And here is what OCC reports as VaR for these selected banks [pg. 9]:





The tables above show that J.P. Morgue had a 78.6 Trillion Dollar derivatives book [446 dollars in bets for every one dollar in equity] and estimates that the most they could expect to lose in any given day is $ 71 million.  [Note:
Amaranth, with an approximate 20 Billion Dollar Derivatives book – lost
an average of $ 420 million for 14 days straight for total losses of
approximately 6 billion at the beginning of Sept. 06].

As a housekeeping note:  Years ago, circa 1998, J.P. Morgue’s management deemed their proprietary measure of assessing risk [VaR] so “brilliant” they “spun it off” in a separate company called RiskMetrics.

Morgan [had] developed a methodology for calculating VaR for simple
portfolios (i.e. portfolios that do not include any significant options
components) called RiskMetrics. The success of RiskMetrics has been so
great that Morgan has spun off the RiskMetrics group as a separate

forecasts the volatility of financial instruments and their various
correlations. It is this calculation that enables us to calculate the
VaR in a simple fashion. Volatility comes into play because if the
underlying markets are volatile, investments of a given size are more
likely to lose money than they would if markets were less volatile.”

RiskMetrics was successfully marketed to some of the most astute, successful risk managers in ALL THE LAND such as:


Bear Stearns


Stearns Global Clearing Services and RiskMetrics Group to Offer Risk
Management, Portfolio Analysis and Investment Planning Solution to
Independent Investment Advisors.

          Publication Date: 25-JAN-06

Article Excerpt
YORK -- Bear, Stearns Securities Corp. and RiskMetrics Group announced
today they have entered into an agreement to offer RiskMetrics Group's
WealthBench(TM) technology platform to independent investment advisors
and family offices via the Bear Stearns WealthSET(SM) wealth management
solution. Investment advisor clients of Global Clearing Services are now
able to access WealthSET's institutional quality risk analytics, investment planning, asset allocation and proposal generation capabilities.



Lehman Bros.


Lehman's prime brokerage to offer clients RiskMetrics tools online

Published online only

Author: Gallagher Polyn

Source: Risk magazine | 13 Dec 2002

Lehman Brothers' global prime brokerage unit will offer RiskMetrics'
RiskManager tool to hedge funds, fund of funds and investors via its
website, LehmanLive. The RiskManager service features value-at-risk,
stress testing and 'what-if' scenario generation.



  • most of the huge derivatives players take a similar standardized approach to evaluating and assessing risk

  • Despite
    relative uniformity in risk management models among derivatives risk
    managers we see a disproportionate number of smaller, relatively better
    capitalized players fail while larger relatively under-capitalized
    bemoths continue to make windfall gains and flourish.

  • There
    appears to be a double standard being practiced by the CFTC regarding
    position limits between the largest derivatives players [like J.P.
    Morgue] and smaller ones [like Amaranth].  Issues of concentration [commodities laws] are enforced on smaller players and ignored on the preferred players.  This
    preferential treatment extends to this day as the CFTC continues to
    “look the other way” while J.P. Morgan and HSBC increasingly dominate
    the short open interest in COMEX silver – even as reported shortages of
    physical metal continue to crop up at national mints around the world.

Perhaps some of you might be wondering how J.P. Morgue et al really do it?  How they can take such HUGE, LEVERAGED risk and seemingly NEVER lose?  Well, here’s a clue:  back in early 2006, Business Week reported,


President George
W. Bush has bestowed on his intelligence czar, John Negroponte, broad
authority, in the name of national security, to excuse publicly traded
companies from their usual accounting and securities-disclosure
obligations. Notice of the development came in a brief entry in the
Federal Register, dated May 5, 2006,


What that means folks, is:  “if
J.P. Morgan is deemed to be acting in the name of National Security or
the National Interest – THEY [and presumably others] CAN “LEGALLY” BE


The reality is that derivatives trading is risky.  Major players in the derivatives trade ALL, more or less, use the same risk management practices.  The
key difference[s] between J.P. Morgan et al and interlopers - hedge
funds - who come-and-go is that the banks who act for the Federal
Reserve have the backing of the Great Guttenberg and they are not
subject to regulatory oversight or accounting. 


key banks have created ridiculously larger and disproportionate
derivatives edifices in key strategic areas of interest rates [bonds],
energy and precious metals where the sheer volume of paper trade
overwhelms and assigns false pricing to the underlying physical trade –
ie. the tail wags the dog.  Control of the pricing
in these strategic instruments works hand-in-hand with global U.S.
hegemonic strategy of dollar price settlements in key strategic
commodities and the perpetuation of supremacy of the Dollar as the
world’s reserve currency. 


It’s in this context that we begin our examination of the Amaranth kill shot.


Review of the Amaranth Kill Shot Sequence


The black text below in “quotes” was excerpted from Ludwig Chincarini CFA, Ph.D, Lessons from the Collapse of Amaranth Advisors L.L.C. linked here [pg. 17].  


chart below chronicles the milestones – beginning with the entrance of
J.P. Morgue into the Nat. Gas futures trading arena at the turn of
1995/96.  It should be noted that the Nat. Gas
price movement that led to Amaranth’s demise has been described by some
very qualified professionals as being a 5 or possibly even as high as a 9
standard deviation event where
the fund lost an average of $420 million per day for the first 14 trading days of September, totaling a final loss of around $6 billion.


According to Dr. Jim Willie PhD. [Statistics] a 5 standard deviation event has a one in 1.74 million chances of happening.  Willie told me 9 standard deviation events do not happen in nature.


appended passage is a play-by-play of Amaranth’s final days where
virtually all of their equity was vaporized in a matter of 14 days.  Chincarini
documents how the CFTC took issues of concentration on the NYMEX
seriously, when it suited them to do so, as it pertained to Nat. Gas and
Amaranth.  Rob Kirby comments in blue:


Excerpt begins:


particular note was an August 8, 2006 complaint by NYMEX officials that
Amaranth’s position in the September 2006 contract (near-month
contract) was too high at 44% of the open interest on NYMEX. … Amaranth
reduced this short position by the day’s close by 5,379 contracts (see
the change in NYMEX contracts from the close of August 7 to the close of
August 8), but they also increased their similar exposure short
position on ICE by 7,778 contracts.


ironically, the request by NYMEX to reduce Amaranth’s positions led
Amaranth to actually increase their overall September 2006 position. At
the same time, they also increased their exposure to the October 2006
contract; a contract that is a close substitute to the September 2006
contract. In particular, they had increased their October 2006 position
in NYMEX natural gas futures by 7,655 contracts and their equivalent
position on ICE October 2006 contracts by 4,984.”


[Rob Kirby note:
to say that the October 2006 contract was a Close substitute for the
September 2006 contract is VERY misleading BECAUSE September was still
the lead “spot” month – and Amaranth was being FORCED to roll out of their spot position – exposing a “weak hand” [like an open wound / blood in water attracts sharks].  If, instead, the “short” – undoubtedly J.P. Morgue - had been told to cover – the price would have EXPLODED UPWARD.  Additionally,
and more telling, the fact that Amaranth was using ICE Nat. Gas
contracts as substitutes for NYMEX contracts illustrates that there *used-to-be* a high degree of correlation between Nat. Gas traded in Europe and Nat. Gas traded in North America – more on this later].



August 9, 2006 the NYMEX called Amaranth with continued concern about
the September 2006 contract and warned that October 2006 was large as
well and they should not simply reduce the September exposure by
shifting contracts to the October contract. In fact, by the close of
business that day, Amaranth increased their October 2006 position by
17,560 contacts and their ICE positions by 105.75. For September 2006,
Amaranth did follow NYMEX instructions by reducing NYMEX natural gas
positions by a further 24,310, but increased September ICE positions by


[Rob Kirby note:  winning or losing when institutional trading often comes down to “who blinks first”.  The CFTC decided that Amaranth would blink first.  At this point, Amaranth’s fate was sealed – and J.P. Morgue undoubtedly knew it.  A
noble assist in the Amaranth Kill Shot sequence has to go another Fed /
Treasury lackey institution – Goldman Sachs – who re weighted their
vaunted Goldman Sachs Commodity Index (GSCI) which, at the time, had
roughly 100 billion in institutional money following it.]


August 10, 2006 another call from NYMEX urged Amaranth to reduce the
October 2006 position since it represented 63.47% of the NYMEX open
interest. In response to this call, Amaranth reduced the October 2006
position by 9,216 contracts, but increased their similar October 2006
ICE position by 18,804 contracts.


the end of this three-day session of calls from the NYMEX warning
Amaranth of its position size in September and October contracts,
Amaranth had actually increased their overall positions from August 7,
2007 to August 11, 2006 in those two contracts by 16,484 (a decrease in
September 2006 positions by 23,143 and an increase in October positions
by 39,627).”


[Rob Kirby note:  commentators made much of Amaranth’s elevated risk [VaR] measures and leverage employed – 5.23 times.  One
should remember that the “other side” of Amaranth’s trades was
principally J.P. Morgue. Morgue is the biggest hedge fund on the planet –
with market cap of roughly 176 billion and a derivatives book of [at
Sept. 30/06] 63.477 Trillion for leverage of 361 times.  Incredibly,
extreme, dizzying leverage NEVER seems to cause P & L problems for
ole J.P. Morgue’s derivatives book which at one time topped 90 Trillion -
EVER.  In fact, at Dec. 31/10, Morgue’s
derivatives book was 78.656 Trillion with market cap of 176 billion for
leverage today of 446 times].  In fact,
Chincarini himself conjectured [on pg. 19],


reconstruction of the VaR of Amaranth’s positions on August 31, 2006
was high, but cannot entirely explain Amaranth’s losses in September
2006 unless one designates the Amaranth collapse as a 5 standard
deviation event.”

Others, like Hilary Till of Premia Capital Management characterized the price move that buried Amaranth as a 9 standard deviation move:

“Hilary Till of Premia Capital Management released a damage control piece assessing aspects of the Amaranth case. She assured us that the market move associated with Amaranth’s loss was a nine standard deviation event. If you don’t know what that means, it is statisticians’ speak for “it won’t happen again.”

[end] -

Interesting, in Dr. Jim Willie’s words, “a 9 standard deviation never did happen, at least not naturally.”

and gentlemen, Amaranth Advisors LLC was surgically removed from the
financial landscape by the Fed / J. P. Morgue in a “joint kinetic

Amaranth Versus Long Term Capital Management [LTCM]


those who forget, LTCM was a hedge fund founded by bond guru John
Meriwether which suffered a spectacular collapse in 1998 and was
subsequently bailed out by consortium of banks at the behest of the U.S.
Treasury and Federal Reserve.  Fed and Treasury
officials argued at the time that the bailout was necessary because the
collapse of LTCM posed systemic implications for the global financial
system.  Here’s why:


Much has been written on the Bank of Italy, LTCM and gold – like this excerpt from Embry / Hepburn back in 2004 at pg. 29:


….in September 1999, quoted Nesbitt Burns gold analyst Jeff Stanley as saying on a conference call: "We've learned Long Term Capital Management is short 400 tons."74


In addition, Frank Veneroso stated:


have received many testimonies that LTCM had extensively used gold
borrowings to fund its leveraged positions, and believe it likely that
the Fed removed these shorts from LTCM's books in the course of the bailout of LTCM.”75


Reg Howe also spoke of the apparent LTCM gold short position:


confidential information from a highly reliable source confirms rumors
that at the time of its collapse, LTCM was short a substantial amount of
gold (300 to 400 tonnes is the range most often mentioned), and that
this position was covered in some type of arranged off-market


Crucial to the allegations of gold price manipulation is a statement Veneroso made in 2002:


conclude from our argument based on the development of an inadvertent
corner in the gold markets, from a “prison of the shorts”, that, since
the Long Term Capital Management crisis in late 1998, the official
sector has been managing the price of gold.77


“prison of the shorts” cited by the renowned gold analyst is the
situation that developed due to the large speculative gold short


When sovereign gold is lent / leased – it is generally sold into the market to raise cash balances.


Italians were lending / leasing their sovereign gold and investing the
proceeds with LTCM. Italy was no doubt attempting to reverse their
sagging fortunes with their substantial sovereign gold holdings due to
the reality that their gold holdings were ONLY losing value over that time frame:






declining gold price was effectively “screwing Italy’s chances” of
QUALIFYING FOR THE EURO – by negatively impacting the value of their


would have made the Italians HIGHLY CAPTIVE and AGREEABLE – given their
predicament - to any proposal to help reverse or alleviate that


that LTCM was infallible – owing to them having a couple of Nobel
laureates on staff and also being predisposed to playing fast-and-easy
with their gold accounts – Italy still wasn’t done. Next up was a gold
loan / lease – arranged by your friendly neighborhood bullion banker
[like Goldman Sachs].  The proceeds were invested
in LTCM in the belief they would earn the ‘magical gains’ that LTCM had
been delivering to their investors.


/ Hepburn tell us that Long Term Capital Management denied they ever
traded gold. In a letter sent to attorneys for the Gold Anti-Trust
Action Committee, LTCM’s attorney James G. Rickards maintained [pg. 29]:


of LTCM, LTCP, nor their affiliates, has ever entered into any
transaction involving the purchase or sale of gold, including without
limitation, spot, forwards, options, futures, loans, borrowings,
repurchases, coin or bullion, long or short, physical or derivative or
in any other form whatsoever.”73


Jim Rickards may be “technically correct” that LTCM was not directly
involved in trading gold or in gold price rigging – they would
UNQUESTIONABLY have had direct knowledge of the genesis of the sovereign
Italian funds that were invested with LTCM – because Rickards’ own bio
states that he principally organized the bailout.  


When LTCM failed, they had to be bailed out because a public bankruptcy would have:


exposed the Italian manipulation of their sovereign gold [which did aid
and abet in a wider – globally coordinated - gold price suppression]




B] that Italy was playing “financial accounting tricks” to qualify for the Euro, i.e.  the Euro might have been still-borne.


the “gang” of investors met at the Fed’s offices in NY to discuss the
bailout of LTCM – it’s been well reported that Greenspan and then Tres.
Secretary Rubin laid it on the table that all LTCM investors were going
to have to help bail LTCM out.


Stearns realized that unsustainable “short” monkey business was
involved where Gold was concerned and basically said – NOT A CHANCE WE
PAY A NICKEL!!!   Further details of the LTCM /
Bk. of Italy / Gold connection are laid out in a subscriber only paper
titled, Fine Italian Dining, archived at


had no golden skeleton buried in any of its closets – therefore a
public bankruptcy / dismemberment – mostly for the benefit of J.P.
Morgue, who effectively got to close out their short nat. gas positions
for pennies on the dollar by ‘absorbing’ Amaranth’s longs – was not only
desirable, but preferred because it sent a clear message to any and all
other hedge funds who might have harbored thoughts of becoming large
players in such a strategic space.


see folks, when you are printing money like a banshee and telling the
world that inflation is running at 2 % - you don’t want interlopers with
deep pockets – like Amaranth – bidding the price of strategic
commodities like natural gas – UP.


Rob Kirby