Merrill Lynch

JPMorgan Trader Accused Of "Breaking" CDS Index Market With Massive Prop Position

Earlier today we listened with bemused fascination as Blythe Masters explained to CNBC how JPMorgan's trading business is "about assisting clients in executing, managing, their risks and ensuring access to capital so they can make the kind of large long-term investments that are needed in the long run to expand the supply of commodities." You know - provide liquidity. Like the High Freaks. We were even ready to believe it, especially when Blythe conveniently added that JPM has a "matched book" meaning no net prop exposure, since the opposite would indicate breach of the Volcker Rule. ...And then we read this: "A JPMorgan Chase & Co. trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the multi-trillion dollar market, according to traders outside the firm." Say what? A JPMorgan trader has a prop (not flow, not client, not non-discretionary) position so big it is moving the entire market? And we are talking hundreds of billions of CDS notional. But... that would mean everything Blythe said is one big lie... It would also mean that JPMorgan is blatantly and without any regard for legislation, ignoring the Volcker rule, which arrived in the aftermath of Merrill Lynch doing precisely this with various CDO and credit indexes, and "moving the market" only to blow itself up and cost taxpayers billions when the bets all LTCMed. But wait, it gets better: "In some cases, [the trader] is believed to have “broken” the index -- Wall Street lingo for the market dysfunction that occurs when a price gap opens up between the index and its underlying constituents." So JPMorgan is now privately accused of "breaking" the CDS Index market, courtesy of its second to none economy of scale and fear no reprisal for any and all actions, and in the process causing untold losses to, you guessed it, its clients, but when it comes to allegations of massive manipulation in the precious metals market, why Blythe will tell you it is all about "assisting clients in executing, managing, their risks." Which client would that be - Lehman, or MFGlobal? Perhaps it is time for a follow up interview, Ms Masters to clarify some of these outstanding points?

A Wall Street Insider's Response To Greg Smith

This cannot be the right course for us to take in the wake of such a widely recognized crisis. The lack of purposeful outrage is deafening. We cannot restore lasting stability to our economy and society unless we are willing to face up to what we did wrong, right it, and throw out the bums who put us there. Without that, the pattern of ever escalating crisis and interventionist, market-distorting solutions will surely lead to a bigger crisis still ahead... Perhaps the most important symbol of our failure to address reform are the pictures accompanying much of the coverage of Greg Smith’s letter, those of a power-posing Blankfein and Cohn, who without the Government’s accommodation might be striking a very different pose, indeed. You want to sign on to Mr. Smith’s army in joint distaste for Goldman’s lost culture? Please, be my guest. But more deserving of your enmity is the insidious co-option of the core premise of capitalism by a handful of people to ensure the banks’ undeserved survival, and their managers’ really nice lifestyle.

Phoenix Capital Research's picture

Do not, for one minute, believe that the folks involved in the Crisis will get away with it. The only reason why we haven’t yet seen major players get slammed is because no one wants the system to crumble again. And the only way for the system to remain propped up is for the Powers That Be to appear to have things under control and be on good terms with one another. However, eventually things will come unhinged again. When this happens, the relationships between Wall Street, the Fed, and the White House will crumble to the point that some key figures are sacrificed.

Frontrunning: March 13

  • Tainted Libor Guessing Games Face Replacement by Real Trades (Bloomberg) - so circular, self-reported data is "tainted" - but consumer confidence is great for pumping a stock market?
  • Japan Sets up $12 Billion Program for Dollar Loans, Increases Growth Fund (Bloomberg)
  • China Hints at Halt to Renminbi Rise (FT)
  • Spain Pressed to Cut More From Its Budget (FT)
  • Bailout can make Greek debt sustainable, but risks remain: EU/IMF (Reuters)
  • Banks to Face Tough Reviews, Details of Mortgage Deal Show (NYT)
  • U.S. and Europe Move on China Minerals (WSJ)
  • Use of Homeless as Internet Hot Spots Backfires on Marketer (NYT)
  • Obama administration seeks to pressure China on exports with new trade case (AP)

Greece Issues Statement On PSI, Says €172 Billion Of Bonds Tendered In Swap, Will Enact CACs, ISDA To Meet At 1pm To Find If CDS Trigger

The biggest sovereign debt restructuring in history is now, well, history. The headlines are finally come in:


We learn that €152 of the €177 billion in Greek law bonds have tendered, which is 85.8%. This means that €25 billion in Greek law bonds have not - these are the hedge funds that could not be Steven Rattnered into participating, and will now sue Greece for par recoveries.This is also the number that ISDA will look at today to determine if, in conjunction with the CAC, means a credit event has occurred. And yes, the CACs are coming, as is the Credit Event finding:


ISDA Unanimous - No Payout On Greek CDS

As expected by virtually everyone:


Keep in mind, as criminal as this appears, and as damaging to the CDS market, the real trigger will be what ISDA does determines following the end of the PSI process. If there is no credit event then either, especially when the CACs are triggered as expected - an event which will certifiably be a trigger event under Section 4.7, then ISDA is truly hell bent on blowing up the CDS market as a hedging vehicle in its entirety.

On The Dizzying Rise And Shattering Fall Of Dan Zwirn

For anyone who traded in the 2003-2007 interval (second liens what else - did anything else even trade in that period), the name DB Zwirn was synonymous with hedge fund perfection. In fact, the only name that stood above it was that of Phil Falcone's hedge fund Harbinger. Gradually, both of these high fliers were replaced in the awestruck trader lexicon with another "legendary" hedge fund, that of Paulson & Co. But for a brief period the Zwirn offce at 745 Fifth is where every fixed income trader wanted to reside. Yet as always happens, anything that is too good to be true, isn't. Below is William Cohan, who in a way that only he can, spins the tale of the the rapid rise and even more rapid fall of the hedge fund manager who had it all by his thirties, only to lose it (mostly) all shortly thereafter.

Frontrunning: February 17

  • German president resigns in blow to Merkel (Reuters)
  • China central bank in gold-buying push (FT)
  • Germany Seeks to Avoid Two-Step Vote on Greek Aid, Lawmakers Say (Bloomberg)
  • Eurozone central bankers and the taboo subject of losses (FT)
  • Bernanke: Low Rates Good for Banks in Long Run (WSJ)
  • Cameron and Sarkozy to test rapport at talks (FT)
  • Chinese Enterprises encouraged to invest in US Midwest (China Daily)
  • Goldman Sachs Group Inc. and Morgan Stanley have reduced their use of "mark-to-market" accounting (WSJ)
  • Regulators to raise trigger for rules on derivatives (FT)

David Bianco Hired By Deutsche Bank To Complete Trinity Of Perma Bull

It seems like it was only yesterday [technically it was September] that David Bianco "departed" his latest employee, Bank of America, where he landed following his "departure" from UBS back in 2007. Today, courtesy of Business Insider we learn that following an extended garden leave, or just a rather choppy job market, Bianco his finally found a new happy place: right in the cave of joy and happiness, also known as Deutsche Bank (aka the bank whose assets are about 80% of German GDP and which recently 'magically' recapitalized itself). Here he will be joined by the two other pillars of perspicacity - Binky Chadha and Joe LaVorgna. What to expect? Who knows - but lots of twisted humor is certainly in store. For the sake of simplicity we present some of the salient soundbites from Bianco and his colleagues over the past 5 years.

S&P Threatens US With Another Downgrade In As Little As 6 Months

Will A be the new AA+? Perhaps, if the S&P follows through with its latest threat. Bloomberg reports that, "the U.S., lacking a plan to contain $1 trillion deficits, faces the prospect of another rating cut in six to 24 months depending on the outcome of November elections, according to John Chambers of Standard & Poor’s. America has had an AA+ rating with a negative outlook since Aug. 5 when the New York-based unit of McGraw-Hill Cos. stripped the nation of its AAA ranking for the first time, citing the government’s failure to agree on a path to reduce deficits. The U.S. has a one-in-three chance of another downgrade, Chamber said today during an S&P sponsored Webcast. “What the U.S. needs is not so much a short-term fiscal tightening, but it has to have a credible medium-term fiscal plan,” said Chambers, managing director of sovereign ratings." Too bad the US doesn't even have a fiscal plan what it will do tomorrow, let alone in the "medium-term" courtesy of the most deadlocked political system ever. As for "credible" - forget it. And as was shown, if the first US downgrade from August 5, 2011 broke the US stock market, we can't wait to find out how the Citadel-controlled, FRBNY-blessed stock market will deal with this particular event. In other news, we are still waiting to hear from Moody's on both the US and France.

Gold Challenges Resistance at $1,750/oz

Gold has risen to 8 week highs despite positive manufacturing data, higher factory activity in Germany, China and the US and the hope that a Greek debt restructuring solution is imminent. Demand for physical in Europe, Asia and internationally remains robust which is supporting gold. Investors will today watch the US weekly jobless claims data for the week ending January 28th. Adding to the very gold supportive interest rate backdrop, Japan's finance and economic ministers are putting pressure on the Bank of Japan to consider easing monetary policy even further. Negative yields on some bonds (such as TIPS) are very gold positive as is moves to let investors buy short term bills with negative yields. Gold is also being supported by central bank buying. Russia's gold and foreign exchange reserves rose to $504 billion in the week to Jan. 27 from $499.7 billion a week earlier.