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Testosterone Pit – Home – The “Sanction Spiral” Elegantly Spirals Out of Control
Testosterone Pit – Home – The “Sanction Spiral” Elegantly Spirals Out of Control.
The “Sanction Spiral” Elegantly Spirals Out Of Control
Attorneys with the SEC’s Investment Management Division are exhorting managers of registered investment funds, such as your mutual fund, to disclose their holdings in Russia and warn of the risks associated with them, now that the Crimean debacle has turned into a magnificent sanction spiral. “Several people familiar with the matter” had been talking toReuters. The SEC is apparently fretting that the funds aren’t truthful with investors and aren’t even thinking about how to respond to the possible outcomes of the crisis.
Investment Management Division Director Norm Champ, when contacted by Reuters, didn’t even deny it. “We want to be proactive,” he said.
The Division contacted asset managers on other occasions when civil unrest erupted or when things threatened to blow up; it wanted to make sure managers weren’t omitting or misrepresenting material information – for example, during the uprising in Egypt in 2011, when the Cairo stock market simply shut down. But this time it’s different: the lawyers at the Investment Management Division were joined by another group of SEC lawyers who focus on risk examinations.
Would the White House be trying behind the scenes to give investors second thoughts about plowing money into Russia? Would it be trying to demolish Russian stocks, bonds, and the ruble? Naw.
The efforts by the SEC, which started “over a week ago,” were accompanied by a White House announcement that 5 million barrels would be released from the Strategic Petroleum Reserve. WTI tanked. Russia, a huge energy exporter, depends on its oil and gas revenues, and knocking down the price of oil could wreak havoc on the Russian economy. It was a declaration that commodities would be used as a weapon against the Putin Regime.
Then on Tuesday, White House spokesman Jay Carney launched another attack on the Russian markets at a press briefing. In light of the sanctions the US and the EU were slapping on Russia, its economy would pay the price, he said. “I wouldn’t, if I were you, invest in Russian equities right now, unless you’re going short.”
Shaken to its roots by these threats, Russia annexed the Crimea and picked a new target: Estonia. A Russian diplomat told the UN Human Rights Council in Geneva on Wednesday that Russia was “concerned” by the treatment of the ethnic Russian minority “in Estonia as well as in Ukraine” … even while Vice President Joe Biden was in Lithuania to calm tattered nerves in the Baltics and the EU.
On Thursday, German Chancellor Merkel announced in Parliament, shortly before the EU summit in Brussels, that the EU would come up with new sanctions, such as expanding the list of Russians subject to travel limitations and freezing assets. And if the situation escalates, there would be “without doubt” economic sanctions, she said. Russia was “largely isolated in all international organizations.” And the G-8, which includes Russia, and whose upcoming shindig has already been cancelled, “no longer exists.”
She was immediately attacked by the parliamentary leader of the opposition Left Party, Gregor Gysi, who accused the government of double standards; the separation of Kosovo too had been a breach of international law, he said, but it had been supported by the German government at the time. The transitional Ukrainian government wasn’t legitimate, he said. “Fascists are part of this government, and we want to give them money?!” Under pressure from the US, Merkel was imposing sanctions on Russia to the detriment of Europe, he said. That’s “moral cowardice.”
The “Putin Doctrine” was what SPD parliamentary leader Thomas Oppermann, who is part of Germany’s governing Grand Coalition, was fretting about. Under that doctrine, Russia could intervene if ethnic Russians were perceived to be in danger outside Russia. It would give Russia an automatic right to intervene anywhere, he said. “Such a right does not exist, and such a right cannot exist.”
Hours later, President Obama announced he’d slapped new sanctions on a “number” of oligarchs, additional Russian government officials, and a bank that provides services to them. The White House was working “closely” with the EU “to develop more severe actions that could be taken if Russia continues to escalate the situation.” Then he urged US Lawmakers to approve the aid package for Ukraine and urged the IMF to put its aid package together pronto. Alas, read…. Aid for the Ukraine “Will Be Stolen” – Former Ukrainian Minister of Economy
As Obama’s words were still echoing around the world, the Russian Foreign Ministry shot back: nine US officials, including Speaker of the House John Boehner and Senate Majority Leader Harry Reid, would be barred from entering Russia. And it published the list on its website.
Delicious irony: that boring list with nine names on it, issued by a Russian ministry whose website rarely gets shared in the social media, lit up a mini-firestorm on VK.com, the second largest social network in Europe after Facebook, and one of the most popular sites in Russia. The list got, as I’m writing this, 538 VK “likes.” Not sure if Obama’s list got anyFacebook likes.
Not to be left out, Standard & Poor’s slammed Russia by lowering its outlook to Negativefrom Stable. “In our view, heightened geopolitical risk and the prospect of US and EU economic sanctions following Russia’s incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia’s already deteriorating economic performance.”
The Sanction Spiral works in a myriad ways and performs, as we can see every day, outright miracles. It spirals elegantly higher and higher and takes on grotesque forms. And by the looks of it, no one at the top has a clue how to back out of it. Yet stock and bond markets in the US and Europe, stuffed to the gills with central-bank liquidity and intoxicated by free money, the only thing that really matters anymore these crazy days of ours, are blissfully ignoring the entire drama, and what may eventually come of it.
The first official warning shot was fired. Not by a Putin advisor that can be brushed off, but by Alexey Ulyukaev, Russia’s Minister of Economy and former Deputy Chairman of the Central Bank. A major escalation. Read…. Kremlin: If The US Tries To Hurt Russia’s Economy, Russia Will Target The Dollar System
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To This Day, No One Knows What Financial Firms Are Sitting on | Zero Hedge
To This Day, No One Knows What Financial Firms Are Sitting on | Zero Hedge.
As powerful as it may be, the Fed is not the market. And since the Fed failed to restore trust in the system by forcing all bad debts to light, the financial world has grown increasingly volatile and broken as investors grow increasingly distrustful of the system and begin to pull their money from it: see market volumes continuing to plunge.
Nowhere is the lack of trust more apparent than in the financial sector. Indeed, it was a lack of trust between banks (inter-bank lending) that caused the credit markets to jam up in 2008, which resulted in the Crash.
That lack of trust continues to this day. In the post-Lehman collapse, instead of forcing real derivative and credit risk out into the open, the Federal Reserve and regulators instead suspended accounting standards and allowed financial firms (and other corporate entities) to continue to lie about the true state of their balance sheets.
As a result of this, the financial sector remains rife with fraud and impossible to accurately value (how can you value a business that is lying about its balance sheet?).
Those times in which a company was forced to value its assets at market prices have always seen said values losing 80%+ value in short order: consider Washington Mutual, which sported a book value north of $70 billion right up until it was sold for… $2 billion.
This type of fraud is endemic in the system. Indeed, we got a taste of just how problematic a lack of transparency can be with MF Global’s bankruptcy, in which a firm with $42 billion in assets lost over 80% of its value since August only to reveal in bankruptcy that it had stolen over $700 million worth of clients’ money.
That MF Global engaged in fraud and stole clients’ money is noteworthy. However, the far more important issue is: HOW did this company receive primary dealer status from the NY Fed nine months before imploding?
The Primary Dealers are the banks that actively engage in day to day activities with the New York Fed regarding the Fed’s monetary policies. Primary Dealers also participate in US Treasury auctions.
Put another way, Primary Dealers are the most elite, well-connected financial firms in the world. They have unequal access to both the Fed and the US Treasury Dept. In order for MF Global to have attained this status it must have passed through a review by:
1) The New York Fed
2) The SEC
This is not a quick nor superficial process. According to the NY Fed’s own site:
Upon submission of a formal application, a prospective primary dealer can expect at least six months of formal consideration by the New York Fed. That consideration may include,among other things, on-site reviews of front, middle, and back office operations, review of compliance programs and discussions with compliance and credit risk management staff, discussions with senior management about business plans, financial condition, and the ability to meet FRBNY’s business needs, review of financial information, and consultation with primary supervisors and regulators.
MF Global passed through all of these reviews to became a primary dealer in February 2011. A mere nine months later, the firm is in Chapter 11 and has admitted to stealing clients’ funds to maintain liquidity.
These developments reveal, beyond any doubt, that financial oversight in the US is virtually non-existent. This returns to my primary point: that trust has been lost in the system. And until it is restored, the system will remain broken.
A final note on this: the NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt?
If the NY Fed cannot accurately audit a financial firm’s risks during a six month review, then there is NO WAY an ordinary investor can do so.
This is one of the biggest risks in the system: that no one has a clue what financial entities are sitting on in terms of garbage derivatives and debts. As MF Global proved, this risk can result in a TOTAL loss of funds.
This type of fraud will continue until the system breaks. At that point hopefully the bad debts will finally clear from the system and we can actually lay a foundation for growth.
For a FREE Special Report outlining how to protect your portfolio from this, swing by: http://phoenixcapitalmarketing.com/special-reports.html
Best Regards
Phoenix Capital Research
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James Howard Kunstler: The Disenchantment of American Politics | Peak Prosperity
James Howard Kunstler: The Disenchantment of American Politics | Peak Prosperity.
Vepar5/Shutterstock
The Disenchantment of American Politics
Considering the problems we face as a nation, the torpor and lassitude of current politics in America seems like a kind of offense against history. What other people have allowed circumstances to run over them like so many ‘possums sleeping on the highway?
The financial disturbances of recent years especially have trashed millions of households, yet the fat middle (no pun intended) of the broad public (ditto) seems strangely content with all the tawdry sideshows of the day — Black Thursday, the Kardashians, the NFL playoffs, Twitter, texting, twerking, side boobs — taking little-to-no interest in politics while their prospects for a habitable future swirl around the drain. How might we account for such supernatural passivity?
And, since human affairs don’t remain static indefinitely, in what direction might things go when the political mood finally heaves and shifts? The possibilities are unsettling.
A Failure to Lead
If you care about poll numbers, they tell a simple story of contempt for the current crop of US political leaders. Congress rates a 12 percent approval rating and President Obama, at 35 percent, scores lower than Richard Nixon did in the midst of the Watergate fiasco. I’m surprised that Obama’s numbers aren’t lower (and I voted for him, twice). After all, few American lives were actually touched by the lies and shenanigans that spun off of Watergate, and money was an inconsequential part of it. But a whole lot of people were affected by Obama’s dissimulations around the Affordable Care Act, while his tragic failure to reestablish the rule of law in banking from the get-go in 2009 probably amounts to impeachable malfeasance. Add to this the NSA domestic spying operations revealed by Edward Snowden plus the troops indefinitely garrisoned in Asian countries and you have a portrait of a creeping Orwellian contagion.
The only whiff of rebellion in the air lately has emanated from the so-called conservative end of the political spectrum: the Tea Party. Its complaints mainly range around the offenses of Big Government, though a certain incoherence pervades its agenda as a whole. (I will get to that presently.) I am sympathetic to gripes against the size and reach of government but I’m convinced that the swerve of US politics in the not-distant future will hinge on the failure of government at this scale to conduct any business competently. Anyway, as a veteran of the hippie uprising of the 1960s, when the Left was insurgent against an obdurate “establishment,” it’s interesting to observe the perverse flip-flop of history that has now put the Tea Party in charge of rebellion central.
The failures of the Left these days are pretty obvious and awful. They got their storybook change-agent elected president and he hasn’t done a darn thing in five years to halt the wholesale racketeering that pervades our national life. Obama’s Department of Justice is home to more zombies than the Grand Cemetery of Port-Au-Prince. The Attorney General’s office essentially signed off on prosecuting bank fraud when Lanny Breuer, chief of the Criminal Division, declared some banks too big to jail. End of story, as Tony Soprano used to say.
Obama promised to brick up the revolving door between Wall Street and the federal agencies and he only added more turnstiles to the gate. Most of the government officials involved in the 2009 TARP program and related crisis management operations are now pulling in six figure salaries at the banks and hedge funds they formerly regulated, while a veteran fixer (Mary Jo White) from the whitest white shoe fixit law shop in the land (Debevoise & Plimpton) was appointed to head the SEC a year ago.
The Left, as represented by President Obama and a majority in the US Senate, did nothing to arrest the ongoing corporate hijacking of the USA. When the Supreme Court ruled in the Citizens United case (2010) that corporations could buy elections via unlimited campaign contributions under the free speech clause of the constitution, Obama had the chance to propose new legislation or a constitutional amendment to redefine the distinction between human persons and corporate “persons.” You’d think that as a constitutional lawyer, he would have been eager to lead on this. But he just ignored the historic opportunity and, anyway, he was on the receiving end of gobs of corporate “free speech” money to run his reelection campaign.
Apart from its pitiful roll-out bugs, the Affordable Care Act has the odor of the biggest insurance scam in history. People joke these days about Obama serving George W. Bush’s fourth term. The internal contradictions of Democratic Party behavior under Obama have only driven political cynicism to new heights. The millennial generation must feel horribly swindled by it.
A Paucity of Good Options
As for the rebellious conservative Tea Party faction, it is hard for me to square their umbrage at Big Government with their avidity for foreign wars (and support for the military-industrial rackets behind them), their failure to oppose the security-state activities of the NSA (while branding whistleblower Snowden “a traitor”), their love of corporate commercial tyranny a la Wal-Mart, their devotion to economically suicidal suburban sprawl, their zeal to control the social and sexual conduct of their fellow citizens, and their efforts to impose religion in civic affairs — all of which is to ask, what do they mean when they shout about “liberty?”
These contradictions probably seem abstruse compared to the gritty plight of ordinary citizens getting monkey-hammered in an economy that can provide neither decent incomes nor dignified, meaningful social roles for classes of people who could be earnest, honest, and enterprising given the chance. This gets to a more general failure across the political spectrum to apprehend the larger changing dynamics of our time — resource scarcity, capital impairment, contraction, environmental collapse, population overshoot — and to frame a coherent response to these developments. In short, the politicians seem to have no idea where history is taking us, and no road-map to prepare for the journey to get there.
There will probably always be some alignment of Left and Right in politics, but from time to time the packages they come in and the ideologies they contain are in desperate need of either rehabilitation or dissolution. I’d bet that we may soon see the demise of both the Democratic and Republican parties as they are currently structured. They’ve been around an awful long time now, and their presence probably provides a certain reassuring familiarity, but that is also the same growth medium as contempt. The useless and tiresome public quarrels they spawn these days, the kabuki theater debt ceiling showdowns, the can-kickings, and other evasions of responsibility, erode basic institutional trust to a dangerous degree; the people lose faith in the courts, the news media, the banks, the value of their money, and eventually all authority. The two major parties function as mere conduits for all the racketeering operations that define life in this nation today. The mature two-party system may prove to have been a transient product of America’s industrial heyday, which is now over despite the euphoria over stock bubbles, shale oil, computers and other new technology. If the two old parties dry up and blow away, will anyone shed a tear for them? When that happens, there may not be enough political vitality left at the federal level to reconstitute them in new packaging.
Trouble Brewing
If party politics are weak, muddled, and contradictory, the divisions between Americans are starkly clear: wealth in America has never been so unevenly distributed — the fabled one percent versus everyone else. Despite the election of a mixed-race president, and the wish-fulfillment fantasies of Hollywood, race relations in the USA remain tense. 2013 was the year of the “knockout” game for black teenagers randomly targeting “woods” (i.e. non-black “peckerwoods”), some of whom died. It was the year of George Zimmerman’s acquittal in the Trayvon Martin case and the echoing recriminations.
Divisions between men and women are tragically compounded by the dangerous dynamics of work in America that leave many men (especially men) in a vacuum of purpose, meaning, and potency. It is almost impossible these days for low-skilled men to support a family. The indignity of this thunders through broken communities and the penitentiary cellblocks. But the anomie is also expressed in the higher ranks of an economy where office work can be done by anybody, and gender confusion lately has been valorized as a compensating mechanism for the marginalization of men and the failure of manhood. The political blowback from this, when it comes, is apt to be fierce. Look no further than Duck Dynasty.
The ongoing national culture war pits the “traditional values” faction against the sexual libertarians; the red states against the blue states; urban against the conflated suburban and rural; the Christian fundamentalists against an array of other positions and belief groups; the entitlement “socialists” against the “free market” conservatives.
Perhaps most divisive of all will be the schism between the young and the old over the table scraps of the dying industrial economy.
These tensions will not remain unresolved indefinitely.
In Part II: Get Ready For Strange Days, we’ll forecast the direction that this resolution may follow. The last time the USA faced a comparable political convulsion was the decade leading into the Civil War, but this time it will be more complex and confusing and it will have a different ending. A dominant theme will be a continued loss of faith in the Federal government to solve our ills, and a re-emergence of reliance on local support networks at the state, municipal, community and family levels.
This devolution will likely play out very differently across the major regions of the US. And most will follow this course unwillingly.
Strange days are coming.
Click here to access Part II of this report (free executive summary; enrollment required for full access).
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JPMorgan, Madoff, And Why No One Dared Ask “The Cult” Any “Serious Questions As Long As The Performance Is Good” | Zero Hedge
As was well-known in advance, today JPMorgan entered into a deferred prosecution agreement with the DOJ, whereby Jamie Dimon’s enterprise, where legal fees and litigation charges are no longer “non-recurring” items but a cost of doing business, paid $1.7 billion (non tax-deductible) to settle all criminal charges that it was aware well in advance that Madoff was a ponzi scheme and did nothing to alert authorities or the general public. What was less known is just how acutely JPM was aware of the developments at Madoff’s pyramid scheme, and that while apparently JPM was not convinced enough of Madoff’s criminality to alert regulators using “Suspicious Activity Reports”, it had seen enough to quietly reduce its exposure with the Ponzi from $369 million at the beginning of October 2008, or just after the Lehman collapse, to just $81 million at the time of Madoff’s arrest.
There is much more on the sequence of events in JPM’s realization that Madoff was a fraud (see filing below), but the punchline is the following extract from lengthy internal email in October 2008 by a JPM trading analyst that raised concerns about Madoff’s investment returns, and which explains why frauds are never caught until it is too late: “The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.… personnel at one feeder fund seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.”
And there you have the biggest failing of modern capital markets in a nutshell: nobody dares to ask any serious questions as long as the performance is good, and where there a cult-like following of the ringleader (see Central Banks). By the time the performance turns bad, and all the overdue questions are finally asked, it is always too late, and the cult blows up.
What is strangely missing in today’s action by the DOJ, which slams JPM (rightfully), is any mention of the SEC, you know – the regulators – those people whose job it was to catch Madoff in the act. Because while pocketing $1.7 billion from JPM may be an enjoyable exercise in populist propaganda for an administration that suddenly realizes it has created an unprecedented social class hatred schism and needs to punish bankers on a recurring, monthly basis, where is there any mention of the SEC’s fault for being completely oblivious to what JPM uncovered on its own? And yes, JPM did not alert the authorities, but at the end of the day its fiduciary obligations are first and foremost to its shareholders, which it executed, and not to a gullible public which opted for yet another “get rich quick” scheme, hoping foolishly that the SEC has some idea what it is doing.
Finally, we can’t help but wonder: when the current bubble to end all bubbles implodes, who will be punished for failing to point out that the emperor is naked, and that it is the cult of the Federal Reserve and its central bank peers around the globe, that have created the biggest Ponzi scheme the world has ever seen?
For those curious about the details of how JPM succeeded in realizing what the SEC failed to grasp, despite numerous vocal warnings from Harry Markopolos, read on.
From U.S. v. JPMorgan Chase – Deferred Prosecution Agreement Packet, Exhibit C
October 2008: JPMC Concludes In A Report To U.K. Regulators That Madoff s Returns Are Probably Too Good To Be True
In mid-September 2008, following the collapse of Lehman Brothers and growing concerns about counter-party risk, JPMCs Head of Global Equities directed investment bank personnel to substantially reduce JPMC’s exposure to hedge funds, which had increased following JPMCs March 2008 acquisition of Bear Stearns. This directive was reiterated by the Investment Bank Risk Committee on October 3, 2008. Acting at the direction of the Head of Global Equities, the Equity Exotics Desk began analyzing which hedge funds to reduce exposure to, including by directing the Desk’s due diligence analyst (the “Equity Exotics Analyst”) to scrutinize investments in various hedge funds, including the Madoff feeder funds. The Equity Exotics Analyst conducted this due diligence by, among other things, analyzing the reported strategy and returns of Madoff Securities, speaking to personnel at Madoff feeder funds and financial institutions administering Madoff feeder funds, and unsuccessfully seeking from the feeder funds and administrators documentary proof of the assets of Madoff Securities.
On October 16, 2008, the Equity Exotics Analyst wrote a lengthy e-mail to the head of the Equity Exotics Desk and others summarizing his conclusions (the “October 16 Memo”), The October 16 Memo described the inability of JPMC or the feeder funds to validate Madoff s trading activity or custody of assets. The October 16 Memo noted that the feeder funds were audited by major accounting firms, which had issued unqualified opinions for 2007, but questioned Madoff s “odd choice” of a small, unknown accounting firm. The October 16, 2008 Memo reported that personnel from one of the feeder funds “said they were reassured by the claim that FINRA and the SEC performed occasional audits of Madoff,” but that they “appear not to have seen any evidence of the reviews or findings,” The October 16 Memo also questioned the reliability of information provided by the feeder funds and the willingness of the feeder funds to obtain verifying information from Madoff. For example, the memo reported that personnel at one feeder fund “seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.” The Equity Exotics Analyst further wrote that there was both a “lack of transparency” into Madoff Securities and “a resistance on the part of Madoff to provide meaningful disclosure.”
The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.” The October 16 Memo concluded: “I could go on but we seem to be relying on Madoff s integrity (or the [feeder funds’] belief in Madoff s integrity) and the quality of the due diligence work (initial and ongoing) done by the custodians . . . to ensure that the assets actually exist and are properly custodied, If some[thing] were to happen with the funds, our recourse would be to the custodians and whether they had been negligent or grossly negligent.”
The Head of Due Diligence responded by complimenting the Equity Exotics Analyst on the October 16 Memo, making reference to other long-running fraud schemes, and suggesting in a joking manner that they should visit the Madoff Securities accountant’s office in New City, New York to make sure it was not a “car wash.”
* * *
JPMC’s Redemptions From Madoff Feeder Funds
On October 16, 2008 — the day of the October 16 Memo — an Equity Exotics employee requested by e-mail a “list of all external trades and the exact counterparty trade” for each of the Madoff-related feeder funds, noting that “[t]le list needs to be exhaustive as we may be terminating all of these trades and we cannot afford missing any.” The Equity Exotics Desk, which had already placed redemption orders for approximately $78 million from the Madoff feeder funds between October 1 and October 15, thereafter sought to redeem almost all of its remaining money in the Madoff feeder funds.
In addition to redeeming its positions in the Madoff feeder funds, JPMC sought, with the assistance of legal counsel, to cancel or otherwise unwind certain of the structured products issued related to the performance of the Madoff feeder funds. In an attempt to unwind these transactions, JPMC told the distributors of the Madoff notes that it was invoking a provision of the derivatives contract that enabled it to de-link the notes from the performance of the Madoff feeder funds if JPMC could not obtain satisfactory information about its investment. For example, in a letter dated October 27, 2008,JPMC warned that it would declare a “Lock-In Event” under the terms of the contract unless the recipient — a distributor that the Equity Exotics Analyst had spoken to as part of his due diligence underlying the October 16 Memo — could provide the identity of all of Madoff Securities’ options counterparties by 5:00 PM the following day.
In the Fall of 2008, the amount of JPMC’s position in Madoff feeder funds fell from approximately $369 million at the beginning of October 2008 (which was down slightly from its high-water mark of $379 million, in July 2008) to approximately $81 million at the time of Madoff s arrest, on December 11, 2008 — a reduction of approximately $288 million, or approximately 80% of JPMC’s proprietary capital invested as a hedge in Madoff feeder funds. During the same period, JPMC spent approximately $19 million buying back Madoff-linked notes and approximately $55 million to unwind a swap transaction with a Madoff feeder fund that eliminated JPMC’s contractual obligation with respect to those structured products. When Madoff was arrested, JIPMC booked a loss of approximately $40 million, substantially less than the approximately $250 million it would have lost but for these transactions.
At the same time, the Equity Exotics Desk also held through the time of Madoff s arrest a gap note providing JPMC with $5 million in protection if the value of a Madoff feeder fund collapsed completely. In a November 28, 2008 e-mail, an Equity Exotics banker declined a third party’s request to buy this protective gap note from JPMC, and described the gap note as being “as of today. . . very valuable” to JPMC.
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Olduvaiblog: Musings on the coming collapse 