[RightWhale]

The dominos are teetering. And all because of California's power problem last year.

[RCW2001]

Interesting stuff...

[Salvation]

Would collapse the banking industry.

My thoughts, exactly when I heard this. (My deceased husband used to be an auditor for the Federal Home Loan Bank Board.) He could never tell me anything, but I thought "Oh, oh." when I heard this.

[gcruse]

There are many kinds of derivatives.  'Unwinding' them
in a very down market sounds like a euphemism for:
 

                        
          'Here, hold muh FDIC.'

[True Capitalist]

Kudlow also mentioned something about Treasury Secretary Paul O'Neil also in NY for some secrete meeting.

If anybody has any additional info PLEASE POST IT!!! Thanks!

[shrinkermd]

This was a rumor all day. I am skeptical. If it were true the stock market would have dropped 1000 points or more.

[kayak]

ping

[Dales]

Ever read the book "The Death Of Ivan Illych"?

[BillyJack]

http://www.financialsense.com/Market/daily/monday.htm

"J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business."


Danger in Derivatives
The media attention has been on the companies that have defaulted on their loans or have filed for bankruptcy protection. To a lesser extent, the attention has been on the banks. A credit bubble has two sides to the equation: the borrower (Enron, Global Crossing, Kmart WorldCom) and the lender (J.P. Morgan Chase, Citigroup, Bank America). Banks have not only been the lender and underwriters on much of this debt, they have also been the writer of derivatives that go hand-in-hand with the expansion of credit. In fact, bank derivative growth has been growing at double-digit rates over the last decade. During the first quarter of this year the notional value of derivatives in bank portfolios increased by $946 billion. Interest rate contracts increased by $972 billion to $39.3 trillion. So in addition to the debt debacle, you also have the danger of another derivative debacle such as we had with LTCM back in 1998. Many of the top banks such as J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business.

On top of making bad loans, the banks also have exposure as the largest underwriters in the derivative business. J.P. Morgan Chase is leveraged over 700-1 when you look at the bank's exposure to derivatives. The net equity of JPM has to back those derivatives. If you look at J.P. Morgan Chase’s derivative book, the bank looks and acts more like a hedge fund then it does a pillar of stability of the financial establishment. The credit problems are only one side of the problem. No one knows what the bank's derivative risks are other than that they have $23.4 trillion in derivatives against equity of around $40 billion.

This isn’t the only problem the bank has at the moment. J.P. Morgan Chase and Citigroup made $5 billion in cash loans using complex transactions that were disguised as energy trades. This made the loans hidden from Enron’s balance sheet. Investigators found out that J.P. Morgan and Citigroup were Enron’s main source of prepay funding. The Senate Governmental Affairs subcommittee is now looking into the extent to what these banks knew and the role they may have played in aiding Enron’s accounting deceptions. J.P. Morgan promoted prepay loans to customers in the 90’s because of their “balance sheet friendly” nature. In addition to the Senate, the Manhattan’ district attorney’s office is looking into the role J.P. Morgan Chase played in making offshore loans to companies in an effort to keep the debt off the balance sheet. Insurance companies, which issued surety bonds as guarantees that Enron would repay its offshore loans, are now suing the banks because they claim the banks kept knowledge of the company’s perilous financial condition from them."

[Centurion2000]

And they'll decide to crank interest rates at the same time ..... shades of '29-32 here.

[Red Jones]

bump

[Thane_Banquo]

And the feces will hit the fan in

5...

4...

3...

2...

[Timesink]

Possible that both banks have billions of derivatives that need to be unwound. Would collapse the banking industry.

This will never happen. Both Citibank and Chase fall into the "too big to fail" category. The feds will bail them out 100% if that's what it takes to keep them from going under. Of course, in such a case, everyone at both banks of middle management rank or higher should expect to be fired, and had better find a good attorney and put him on retainer.

[Torie]

This is a rather hysterical headline. If this was an issue, one would think we would have had some wind of it. Is the fact that these two banks are the ones that have Enron exposure just a coincidence? Maybe Kudlow has his wires crossed and that is the source of the exposure, not "derivatives."

[OldFriend]

Another bailout of his buddies....much as he did when Long Term Capital collapsed. Dirtbags all! Bring on the jail cells.

[dalebert]

This should clear the air.

[terilyn]

Ping

[USA21]

Citigroup, J.P. Morgan Marketed Enron-Type Deals to Other Firms

Tue Jul 23

Citigroup Inc. (NYSE: C - News) and J.P. Morgan (NYSE: JPM - News) Chase & Co . , already facing scrutiny for devising allegedly deceptive transactions for Enron Corp., marketed similarly structured deals to a slew of other companies, Tuesday's Wall Street Journal reported, citing testimony that a senior congressional investigator will give at hearings that start today.

The names of the other companies weren't disclosed.

The hearings, part of a Senate investigation into the role banks played in Enron's troubled finances, are the latest in a series of investigations into the two banks regarding their ties to Enron, which filed for bankruptcy-court protection late last year. The investigations include separate probes conducted by the Securities and Exchange Commission ( news - web sites) and the office of Manhattan District Attorney Robert Morgenthau.

Now, a person familiar with the matter says, the Justice Department ( news - web sites)'s Enron Task Force also is looking into the roles that financial institutions, including Citigroup, J.P. Morgan , Merrill Lynch & Co . and National Westminster Bank, now a unit of Royal Bank of Scotland PLC, may have played in Enron's demise.

Citigroup and J.P. Morgan declined to comment on the hearings or the investigations. Merrill and Royal Bank of Scotland couldn't be reached for a comment.

The deals under congressional scrutiny include arrangements known as Yosemite, devised by Citigroup, and Mahonia, devised by J.P. Morgan , both of which were designed to make Enron's public disclosures more appealing to investors, according to the testimony.

An official familiar with the investigation will testify at today's hearings before that panel that Yosemite, Mahonia and other deals allowed Enron to understate its debt by 40% while overstating cash flow by as much as 50%, according to a draft of his statement. Cash flow is a crucial measure of financial health for energy companies such as Enron.

"The evidence indicates that Enron would not have been able to engage in the extent of the accounting deception it did, involving billions of dollars, were it not for the active participation of major financial institutions," says a copy of the testimony.

Banks such as J.P. Morgan and Citigroup were "willing to go along with and even expand upon Enron's activities."

J.P. Morgan , in fact, had a "pitch book" to sell other companies on similar financing vehicles, according to a copy of the testimony. J.P. Morgan entered into similar transactions with seven other companies, while Citigroup shopped such deals around to as many as 14, with at least three entering into such relationships, the testimony says.

The hearings will focus on a commodity-trading vehicle known as a prepay, in which a financier gives money in exchange for future delivery of a commodity such as gas, gold or oil. Such arrangements are common, but in the hands of Citigroup and J.P. Morgan , they became the building blocks for extremely complex transactions that Enron used to disguise debt as trades and create the appearance the company was generating cash, people familiar with the matter said.

Wall Street Journal Staff Reporters Jathon Sapsford and Paul Beckett contributed to this report.

[Vidalia]

See THIS...

[unixfox]

Blame it all on the Bush tax cut.