The Elephant in the Room

[shiny!]

An address by Rob Kirby of GATA from 2008, recently updated, "showing how JPM's derivatave books cannot be hedged."

http://www.24hgold.com/english/news-...0&redirect=Fal

Near the end he says:

According to the U.S. Treasury:

“During the July – September 2007 quarter, Treasury borrowed $105 billion of net marketable debt….”

J.P. Morgan is but one of 20 primary dealers of U.S. treasury securities.

50 % of all Treasury Securities auctioned over this period were 2 yr., 20 yr, or 30 yr. – so they were not used to hedge swaps. This leaves a balance of around 50 billion bonds suitable for hedges.

Treasury also tells us foreign participation in U.S. bond auctions typically tops 20 %. So you’re now left with 40 Billion in “net new” U.S. Treasury Securities – suitable for hedges - to distribute among all domestic players for an entire quarter. The growth component of J.P. Morgan’s book alone, if it’s hedged, requires more than 1.4 billion more than this amount every day!

Bonds required to hedge the growth in Morgan’s Swap book are 1.4 billion more in one day than what is mathematically available to the entire domestic bond market for a whole quarter?

This interest rate swap book is not hedged. J.P. Morgan is the FED.

If you believe the yeomen’s work of John Williams of Shadow Gov’t Stats – this helps explain how we get bogus inflation reports from officialdom in the 2 % range when in reality it is running “double-digits”.

Though I try, my understanding is pretty poor when it comes to derivatives, hedging and the complex financial actions of Wall Street. Can someone please explain the significance of JPM's derivitave books being unhedged? And why would he say that JPM is the FED?

[c1ue]

Re: The Elephant in the Room

Though I try, my understanding is pretty poor when it comes to derivatives, hedging and the complex financial actions of Wall Street. Can someone please explain the significance of JPM's derivitave books being unhedged? And why would he say that JPM is the FED?

This is all stemming from the largely discredited VAR risk model:

The concept is that the amount of value (money) at risk (VAR) is defined as unhedged exposure.

Of course in reality, as AIG showed, simply because you own a hedge doesn't mean said hedge will get paid off. That is, unless Uncle Sam shoves his way into the equation.

What this in turn means is that if there is a significant shift in the Treasury market opposite that of JP Morgan's bets, then JPM will eat huge losses.

But of course this in turn also incorporates a large number of assumptions:

1) That the Treasury market is in any way independent
2) That the federal government/Fed won't intervene
3) That fictitious Treasury bonds or hedges can't be made to appear

The last item is because under a number of forms of analysis, the amount of Treasuries outstanding is seriously divergent from the amount of Treasuries sold. Either a lot of cross holding is going on or Ponzi schemes are operating.

[shiny!]

Re: The Elephant in the Room

This is all stemming from the largely discredited VAR risk model:

The concept is that the amount of value (money) at risk (VAR) is defined as unhedged exposure.

Of course in reality, as AIG showed, simply because you own a hedge doesn't mean said hedge will get paid off. That is, unless Uncle Sam shoves his way into the equation.

What this in turn means is that if there is a significant shift in the Treasury market opposite that of JP Morgan's bets, then JPM will eat huge losses.

But of course this in turn also incorporates a large number of assumptions:

1) That the Treasury market is in any way independent
2) That the federal government/Fed won't intervene
3) That fictitious Treasury bonds or hedges can't be made to appear

The last item is because under a number of forms of analysis, the amount of Treasuries outstanding is seriously divergent from the amount of Treasuries sold. Either a lot of cross holding is going on or Ponzi schemes are operating.

Thank you, c1ue. That helps.