-- Posted Friday, 5 September 2008 | Digg This Article
| Source: GoldSeek.com
By: Rob Kirby
A headline which caught my attention today involved none other than J.P. Morgan and their announcement that – facing a federal probe - they were going to “exit” the municipal bond market. More specifically, J.P. Morgan said,
“[they] will stop selling interest-rate swaps to government borrowers in the $2.6 trillion U.S. municipal bond market roiled by an antitrust probe and the near bankruptcy of Alabama's most-populous county.
At least seven former JPMorgan bankers are under scrutiny in a Justice Department criminal investigation of whether banks conspired to overcharge local governments on swaps and other derivatives. The bank also is embroiled in negotiations over how to resolve a debt crisis with Jefferson County, Alabama, where the county's former adviser says a group of firms led by JPMorgan, the third-largest U.S. bank by assets, overcharged it by as much as $100 million for financing a new sewer system.
Banks marketed unregulated derivatives as a way for municipalities to save money. The financing, which local officials across the country have said they didn't understand, backfired this year as fallout from the global credit crisis caused borrowing costs to rise more than fourfold in some cases to as high as 20 percent……
With a show of hands, who realizes the mistake that J.P. Morgan made?
Was it overcharging their customer by perhaps as much as 100 million dollars?
Maybe the mistake was selling complex derivatives to customers that didn’t really understand them?
Then again, perhaps J.P. Morgan’s biggest mistake was “getting caught” – errr, inviting, o.k. - heck SCREAMING, for someone to investigate just what the real purpose is of their colossus of a derivatives book [93 Trillion in notional as its high water mark ]?
When one stops to consider that the line of business J.P. Morgan just announced they are exiting falls into a slim segment of the derivatives business broadly titled “END USER NOTIONALS” – which is now suspected of being fraudulent - one can only wonder what kind of hi-jinx are occurring in the overwhelmingly vast majority of trade represented by TOTAL NOTIONALS in the chart below:
The overwhelming majority of J.P. Morgan’s derivatives book is composed of interest rate swaps:
Kirbyanalytics.com analyzes, in detail, how J.P. Morgan [really the Fed in drag] utilizes interest rate derivatives to control the interest rate complex in a research paper titled, The Elephant In The Room, archived for subscribers at the site.
-- Posted Friday, 5 September 2008 | Digg This Article | Source: GoldSeek.com
