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In a couple of earlier articles, we've examined the relationship between first
- plunging natural
gas prices and the "astounding ramp-up" of notional in J. P. Morgan's derivative
book in Q1:06. Then we took a look at the re-jigging of Goldman Sachs Commodity
Index [GSCI] and its deleterious effects on the price
of gasoline - just in time to bolster crumbling Republican popularity ratings
prior to the crucial mid - term elections.
This essay serves to complete the energy tri-fecta with a little contrarian's
look-see into some of the possible reasons as to what or who might be influencing
the manic swings we've been experiencing in crude oil prices.
Background: All Roads Lead To Baghdad
As early as June of 2003, we
know that certain American banking institutions were eying and sizing
up potential new business in Iraq,
"Three of the top US banks, including J.P. Morgan, Citigroup and
Bank of America, have set their eyes on the lucrative banking business in
Iraq, according to a recent report in The Wall Street Journal. These banks
and several others have conferred with Treasury Department officials in recent
weeks. They are said to be interested in helping the Iraqis build a modern
retail banking system as well as with trade finance, payments systems and foreign
currency exchange....." [RK bold emphasis]
Amazing isn't it, how some helpful folks set up an English
language web site so they could keep all of us in the Western World apprised
of the 'late breaking news items' deemed important for us to get snippets
of? Also, ever stop to wonder what the poor Iraqis would have done without
the "help" of the likes of good ole J.P. Morgan Chase? Just think - a nice
shiny, new retail banking system - yummy!!! And what's this about TRADE
FINANCE, PAYMENTS SYSTEMS AND FOREIGN EXCHANGE? What could a war torn,
debilitated bombed out infrastructure that is and was Iraq possibly have
that would be of interest to good ole J.P.M? I mean, exactly what does
Iraq have that the rest of the world wants or needs besides oil?
Well, there is a small issue of settling up some existing Saddam era sovereign
debt, owed to an assortment of foreigners that we
learned about in January 06,
"Despite initial complaints, Iraq's larger commercial creditors agreed in
Singapore last month to trade their Saddam-era debt for new bonds with a
NPV of 20% that of the former debts. In general Jubilee Iraq considers this
to be a reasonable deal and praises the Iraqi government and all those involved.
As a whole the commercial loans were less odious than the politically-motivated
government loans, although there are still specific cases in which certain
commercial loans could fairly be judged illegitimate due to their connection
to corruption or arms dealing. Hyundai, one of the largest commercial creditors said: "Of
course it isn't satisfactory, but we have decided to honor the deal.".....
I guess 20 cents on the buck in new bonds was preferable to 20 cents on the
buck in a new loan, as this December
05 article would seem to indicate,
"The FT
reports that restructuring of Iraq's outstanding debt is entering a
pivotal stage this week. However, not everybody is pleased with a process
that has been moving ahead at a rapid speed.
But some of the large commercial creditors say they are being treated unfairly
and are getting a worse deal than government lenders.
Iraq launched the offer to the larger private creditors last month, giving
them a choice of exchanging the debt owed to them for either bonds or loans. The
offer, orchestrated by US banks JP Morgan and Citigroup, follows the
completion of cash buyback deals with smaller commercial private creditors.
Ali A. Allawi, minister of finance, said Iraq was "demonstrating its commitment
to treating all creditors in a fair, transparent and even-handed way"....
So, while J.P. Morgan was treating [themselves, perhaps?] everyone fairly
and transparently, a few of you might be surprised to learn that as a result
of this same Dec. 05
article above,
".....said Richard Segal, chief strategist at Argo Capital, the hedge fund, "When
it's all over, the private sector will receive half the 20 per cent net
present value proclaimed by the Paris Club." Some private creditors
argue that the assumptions that went into the Paris Club deal were flawed. They
were based on IMF debt sustainability calculations that assumed a price
of $26 for a barrel of oil. Oil prices are hovering just below $60." [RK
bold emphasis]
Imagine that; another [group of, perhaps?] hedge fund[s] getting a good ole
fashioned fleecing at the hands of "helpful" J.P. Morgan - with an assist to
the I.M.F., who so kindly built an assumption of 26 bucks per barrel
of oil into their restructuring!
What a bunch of stand up guys!
But It Gets Worse....So Much Worse
Now, if one stops to consider the timing of Iraq's FREE and DEMOCRATIC National
Elections - forced upon them in December of 2005 - amid fierce insurgency and
sectarian violence being reported daily in the mainstream western press - and
the rationale that WE were all force fed how successful Democratic
Elections would "CRUSH" the insurgent's will to fight. You all remember
that, right?
Well, you might want to re-consider after reading the following as to why DEMOCRATIC
ELECTIONS were deemed "so necessary" at that time. On December
23, 2005 it was reported,
"Today the
IMF announced that, a week after the elections, the Interim Iraq Government
has signed a Standby Agreement. This makes Iraq eligible for further
IMF loans and commits it to following a list of IMF economic policies and
meeting certain targets. It was a requirement of the Nov 2004 Paris
Club debt agreement.
Jubilee Iraq has been
consistently arguing for the last few years that:
- Significant long term agreements such as this should be negotiated
by a permanent elected Iraqi government.
- Many of the specific policy recommendations of the IMF could be disruptive,
increasing poverty and unrest in Iraq.
- Cancellation of Saddam's odious debt should not be linked to economic
conditions which infringe on Iraq's sovereignty........" [RK bold emphasis]
Of Course, All This Is Being Done For the Iraqi People...
Does it only appear to "moi" that the timetable for National Elections in
Iraq - whether they were ready for them or not - was set by bankers? It sure
smells like the helpful bankers wanted a government in place which would have
the appearances of "BEING PERMANENT" before they could 'paper over'
their long term agreements that could / would be disruptive or increase poverty
and unrest in Iraq? I wonder if any of you, like me, are wondering just "who" Jubilee
Iraq is anyway [linked above]?
Now, we've identified how "THE NEW IRAQ" managed to qualify for the
new I.M.F. loans - it's all backstopped by oil, of course. And with a newly
elected democratic government, the next thing Iraq needed, naturally, was a
shiny new CENTRAL
BANK to make sure everything went just right! You see, as an adjunct [actually
a precursor to it] to this new Central Bank, there was established another
entity known as the Trade Bank of Iraq,
"Trade Finance: The Trade Bank of Iraq (TBI) was established in July
2003 to facilitate trade of goods and services to and from Iraq by providing
irrevocable letters of credit. The TBI officially became fully operational
in December 2003 and has a services contract with a multi-international
banking consortium led by JP Morgan Chase. Since opening in December,
the Trade Bank of Iraq has issued or has pending 183 letters of credit,
totaling $708.9 million in imports from thirty-one countries. Letters of
credit have been issued on behalf of Iraqi Ministries as well as several
state-owned enterprises." [RK bold emphasis]
As Bruce Proctor, senior vice president and global trade-services head
at J.P. Morgan, discusses the Trade Bank of Iraq's roleand explains,
"Many foreign companies are interested in transacting business in Iraq,
but aren't quite certain how to go about it. They regard the country as a
potentially attractive market with tremendous infrastructure needs, but are
concerned about the challenges that stand in the way. Exporters either have
limited information on how to conduct business in Iraq or believe that the
opportunities are limited to a select few companies with access to large
contracts. Recent developments, however, have changed the landscape. In May
2003, after the U.N. Security Council and the United States lifted most economic
sanctions, Iraq became officially open for business. With the new Trade Bank
of Iraq (TBI) now operational, there are numerous opportunities for companies
to participate in commercial trade flows or perform as subcontractors. In
its first two months of operation, the TBI and its international banking
partners issued approximately 100 import letters of credit (LCs) supporting
over $200 million in humanitarian and reconstruction-related imports."...........
"Given that the country's banking sector is not yet fully recovered, TBI
is playing a vital role in facilitating imports into the country. Established
by the CPA last July, the Baghdad-based bank provides a critical payment
mechanism for Iraq's procurement needs. A banking consortium led by J.P.
Morgan Chase has assisted in the development and operation of the trade bank
by providing banking knowledge, systems capabilities and operational support
to the Iraqi-staffed institution."
Doing business in Iraq, with no
rule of law - sounds like risky stuff, ehhh?
How J.P. Morgan Manages Risk.......
To get your head around how ole J.P. Morgan manages energy risk, we need look
no further than their
own web site, where they're more than happy to tell us,
Risk magazine, January 2006
J.P. Morgan was named Risk magazine's Energy derivatives house of the
year in their January issue. According to Risk, "J.P. Morgan
has emerged as a key player in energy derivatives over the past year." Since
2004, under the guidance of Beau Taylor, global co-head of Energy, the
firm has built a leading energy trading practice. Focus has extended from
natural gas and crude exotic derivatives to include electricity, coal and
emissions trading. [RK bold emphasis]
They wear it like a badge of honor, don't they? To "borrow" a cliché [pun
intended] - these guys really are good, aren't they?
Without being a lawyer, I'm going to go out on a limb and guess that J.P.
Morgan being selected [like there was really a choice, ehhh?] to head up the
Trade Bank of Iraq and "facilitate trade with the outside world" - good ole
J.P. Morgan - like Pooh Bear himself - just might have happened to fall directly
into the "honey pot" giving them free reign to sell a bit of crude oil forward
to hedge a bit of their risk, perhaps?
If You've Got A Problem, Consult An Investment Professional....
Ask yourself this if you would; could there be a jurisdiction anywhere on
the planet where the state of affairs is more murky or lacking transparency
than Iraq? We get a better understanding of this concept from none other than, Saving
Iraq From Its Oil, published by the good folks over at the vaunted Council
on Foreign Relations [CFR],
"As the United States, the United Nations, and the Iraqi Governing Council
struggle to determine what form Iraq's next government should take, there
is one question that, more than any other, may prove critical to the country's
future: how to handle its vast oil wealth. Oil riches are far from the blessing
they are often assumed to be. In fact, countries often end up poor precisely
because they are oil rich. Oil and mineral wealth can be bad for growth and
bad for democracy, since they tend to impede the development of institutions
and values critical to open, market-based economies and political freedom:
civil liberties, the rule of law, protection of property rights, and political
participation."
With an outstanding notional derivatives book measuring some 53 TRILLION at
Q1:06 [representing a 5 TRILLION increase for the latest quarter alone]
- we certainly know that the folks over at J.P. Morgan have a penchant for
using OTC derivatives to hedge risk, don't we? Well, here's a snippet of what
the Derivatives Study
Center had to say about the wide spread proliferation and use of OTC derivatives;
"Fraud and manipulation are an ever present danger in these markets and
should not be recklessly assumed away."
And,
"One common strategy to manipulate market prices is through the use of derivatives
markets, especially non-transparent over-the-counter derivatives markets,
because a large position can be amassed and unwound without being observed
by the overall market."
We also know that the possibility of fraudulent practices where OTC crude
oil derivatives are concerned is something that politicos have duly noted and publicly
discussed, don't we?
"The unavailability of key information on over-the-counter trading activity
makes detection and prevention of price manipulation difficult, if not
impossible."
Over and Above Extraordinary Popular Delusions and The Madness Of Crowds....
Oh, and just to refresh everyone's memory, let's not forget Enron's Special
Purpose Entity of a fraudulent honey pot, Mahonia,
"These insurance companies were recently involved in a lawsuit that was
initiated by J.P. Morgan. As the operator of Mahonia, J.P. Morgan faced
major losses when Enron declared bankruptcy. The firm sought $1.1 billion
from Enron's insurers to cover losses it suffered through the pre-paid energy
trades. Enron's insurance companies, however, argued that they shouldn't
have to pay. Their argument centered on the assertion that the 'trades' that
they had insured had turned out to be "disguised loans." Their commitment
to provide "absolute and unconditional" coverage, they stressed, did not
apply toward covering "fraud." They held that J.P. Morgan had conspired with
Enron to hide the company's debt by giving it loans masked as pre-paid energy
trades with Mahonia."..................
"An impetus for J.P. Morgan to keep Enron afloat could have been that
Enron was highly indebted to J.P. Morgan. Through joint ventures, Mahonia
pre-paid trades, and securities, J.P. Morgan had a financial exposure to
Enron of over $2.1 billion. Further, through its Mahonia deals alone J.P.
Morgan earned $100 million in interest and fees from Enron. This amount
is separate from the earnings the firm made as a lender, M&A advisor,
structured finance provider, and limited partner for Enron." [RK bold
emphasis]
Now, ask yourself if this type of behavior is / was habitual or was it a "one
off" transgression? But before you answer that question, consider
this;
Fraudulent U.S. Bank Derivatives Behind Parmalat's Insolvency
by Michael Edward
It is currently estimated that at least $17 BILLION (*updated estimate)
of Parmalat funds have simply disappeared and cannot be accounted for. The
way this came about is a complex web of high risk derivatives based on worthless
bonds which, in turn, were founded through offshore shell companies. IF this
derivatives scandal is ever fully exposed, the collapse of U.S. and European
banks, and the U.S. and European economies, will be eminent. After derivative
based scandals like Enron and WorldCom, this just may be the pin that bursts
the financial balloon.
Starting in 1997, Parmalat entered into numerous North and South American
company acquisitions. The purchase of these companies created large bank
debts for Parmalat primarily through Bank of America, Citicorp,
and JP Morgan Chase. By 2001, these Parmalat buy-outs were already
drowning in red ink. Initially, the banks hedged these losses with high risk
interest swap derivatives......
I wonder if J.P. Morgan's stock holders [or the counterparties, a.k.a. other
sides, of their 53 Trillion worth of derivatives trades, perhaps?] have any
idea that their financial fortunes might be somehow tied to long term contracts
or outcomes in war torn Iraq? What do you all think?
Then again, there's probably no reason for concern. But we've all been told
that what happens in Iraq is in the National Interest, right? So, on a parting
note, let's just remember that Dawn Kopecki recently reported in BusinessWeek
Online in a piece titled, Intelligence
Czar Can Waive SEC Rules,
"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, that was opaque to the untrained eye."
At the end of the day perhaps we should say, everyone can hibernate, go back
to sleep and forget about all of this for the winter - there's nothing to worry
about in this "if you don't know, it can't hurt you" Goldilocks World, is there?
Yum-Dee-Dum-Dum
Banking is fun,
My honey is gold,
And I've got some
How bout you?
Oh, bother!
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