Sunday, January 3, 2010

Amaranth and JPMorgan Chase

I recently read LAST MAN STANDING, Duff McDonald's biography of Jamie Dimon, the Chief Executive of JPMorgan Chase.

It is rather too hagiographic for my taste, but it does use Dimon's POV to give a clear account of some of the recent Wall Street turmoil, and for this I am grateful.

I appreciated the brief of the post-Amaranth litigation in particular, and will quote a bit of that here both for its inherent interest and to give a bit of the flavor of the book.

"In the summer of 2006, Dimon, [and his co-heads of investment banking Steven] Black, and [Bill] Winters made their most audacious play of the year when they snapped up a portfolio of disastrous bets on natural gas prices that had been made by Amaranth Advisors, a $9.2 billion hedge fund that was facing collapse if it couldn't get the underwater trades off its books. On the weekend of September 16, Amaranth was desperately seeking a buyer for the trades. Goldman Sachs offered to do a deal for a portion of the total, but it demanded a $1.85 billion payment to relieve Amaranth of the positions.

"Lacking that much cash, Amaranth turned to JPMorgan Chase, the hedge fund's clearing broker, and asked if the firm might return $2 billion of posted collateral so it could get the deal done. Steve Black and Bill Winters refused. [Then there was a similar back-and-forth involving Citadel]. The answer, in the end, was obvious. JPMorgan Chase and Citadel made a joint bid for the trades. (With JPMorgan Chase in on the deal, the question of releasing collateral somehow disappeared.) The company made about $725 million in profit on the positions, in part by turning around and selling many of those it had just purchased to Citadel....Amaranth later sued JPMorgan Chase for more than $1 billion, accusing the company of abusing its position as the hedge fund's prime broker to put the kibosh on the deals with Goldman and Citadel in favor of its own purchase....

"Dimon, who considers the lawsuit 'silly,' had no pity for the collapsed fund."

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