JP Morgan's Commercially Impotent Portfolio: Do All Signs Point to the Fed?

GATA never fails to stir up a little scandal, and it's truly a shame that they don't get more press. God forbid we be called a gold bug, right?

But this is one hell of an accusation. Of course, the thought that the Fed is in fact using investment banks in some kind of strange money laundering scam is certainly not a new one. Why force Goldman Sachs to take TARP money that they did not need? Why deny LandAmerica the money to cover up their Ponzi scheme but funnel billions through AIG to counterparties? If you're going to cheat the system, the least you can do is do so in a way that doesn't make one think you are picking favorites and all. Just sayin.

Anyway. The summary if you've only got a three second attention span (via

GATA consultant Rob Kirby of Kirby Analytics in Toronto has updated the address he delivered at GATA's Washington conference about J.P. Morgan Chase & Co.'s interest rate derivatives portfolio. Kirby writes that this portfolio "serves no observable or commercially productive purpose" but "exerts pressure on the global interest rate complex." He concludes that Morgan Chase's interest rate derivatives book is not hedged and that Morgan Chase is actually just a front for the Federal Reserve. Since Morgan Chase often has acted openly for the Fed in recent months, this should not be such a stunning revelation to anyone except, of course, the mainstream financial press.

And then we get to the good part on the elephant in the room (via Gold Seek):

Some, like the OCC themselves, might argue that ‘netting’ – or balancing short against long internally within J.P. Morgan’s book – reduces the amount of bonds required to hedge. Over time netting would have some effect – but “netting” generally occurs at day’s end. This math does not even work intra-day:

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.

Well that is one hell of an accusation. But as most of us are probably already aware, JP Morgan IS the Fed, or at least a founding shareholder (which means JPM and the Fed go waaaaay back).

And when in doubt, just sniff around for the creative accounting (better, sanctioned by TPTB!):
If you’re wondering why J.P. Morgan never seems to get caught up in any sort of hideous mark-to-market losses concerning their derivatives or hedge book – consider that back in the spring of 2006, Business Week’s Dawn Kopecki reported,

“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.”

So do any of you think that J.P. Morgan gets a pass? I would suggest to you that if they had not – our whole financial system would already have collapsed in a heap.
Remember how much we loved mark to market back in 2006, right? (via TradersAccounting):
Whenever we consider the benefits of trader tax status, the one item that tops the list is the ability to elect a special accounting method known as mark-to-market, or MTM for short. While mark-to-market won’t automatically turn your losing positions into winners, it can have an almost magical effect on your after-tax earnings and day-to-day record keeping.

Sound too good to be true? Actually, for most traders, MTM is indeed the magic bullet that enables them to fully deduct their business-related expenses, avoid the time-consuming wash sale rule and remain exempt from self-employment tax.
I believe we have realized that mark to market was not all it was cracked up to be (or should that be "was all it was cracked up to be and bit exuberant investors in the ass after they realized what works in good times to buff up the great math can also turn the knife when the good math runs out"?) so we won't even open that particular can of worms at the moment.

One must also wildly postulate, then, as to the significance of JP Morgan's move into gold futures. Is this a Fed-sanctioned attempt to choke gold?

Merely planting the seed, kids. Gold isn't going to be able to break $1000 anytime soon as a result, despite "fundamentals" which should show otherwise. But you knew that already, didn't you?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.