Even Greenspan's Getting Queasy Over Morgan's Derivatives Business

May 8, 2003

For years GATA's Bill Murphy and Reg Howe have been warning about JP Morgan Chase's derivatives business, and for their trouble they have been derided as nuts. As you'll see from the Reuters dispatch appended here, Federal Reserve Chairman Alan Greenspan today validated their warnings.

Not that Greenspan could suggest DOING anything about the problem. Indeed, he said he continues to oppose government regulation of derivatives.

So what is Greenspan's game here? Is he just trying to ensure that the historical record shows he saw Morgan's collapse coming, even if he didn't do anything about it or even facilitated it? Is he warning other financial houses to wrap up or re-insure their positions with Morgan? Is he giving alert citizens a hint of his own and the Fed's ineffectuality so they may begin contemplating how to protect themselves?

In any case, something big and bad seems to be up -- something for which the only antidote may be the sort of shiny yellow stuff available from the reputable enterprises listed at the bottom of this dispatch.

CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc.

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Greenspan alludes to JP Morgan's derivatives risk

By Chris Sanders and Eric Burroughs Thursday, May 8, 2003 http://biz.yahoo.com/rf/030508/financial_jpmorganchase_derivatives_1.h tml

NEW YORK (Reuters) -- JP Morgan Chase found itself under the spotlight on Thursday when Federal Reserve Chairman Alan Greenspan alluded to the bank's massive derivatives portfolio and the threat it may pose to markets.

JP Morgan's $28 trillion share of the more than $100 trillion derivatives market makes the bank almost too big to fail, experts said.

The No. 2 U.S. bank is by far the leader among the handful of banks that dominate the derivatives market, and Greenspan warned that troubles like credit rating downgrades at one of the firms could lead to disorder in financial markets.

JP Morgan declined to comment on Greenspan's remarks.

The bank's role in the derivatives markets means it has financial relationships that extend well beyond Wall Street, reaching deep into Corporate America and around the world.

"The government is not going to let the derivatives market collapse because JP Morgan collapses," said Richard Bove, a bank analyst with Hoefer & Arnett.

But as Greenspan warned in a Thursday speech, "When concentration reaches these kinds of levels, market participants need to consider the implications of exit by one or more leading dealers."

In his role as chief bank regulator, Greenspan is letting the world know he is keeping a keen eye on the rapidly expanding derivatives market.

That said, Greenspan again praised the role that complex derivative contracts have played in fortifying banks against the repeated shocks that have hit in the past few years, including the stock market crash, economic downturn, record bankruptcies and the Sept. 11 attacks.

Derivatives are contracts based on the value of underlying securities or other variables, ranging from interest rates and currencies to energy and weather. They allow users both to spread risk and to make big leveraged bets.

"He's making the market aware of the issues and letting the market correct them. There's a lot of power in the raised eyebrow," said Eugene Ludwig, a managing partner at risk management firm Promontory Financial Group, and former head of the Office of the Comptroller of the Currency.

Aside from JP Morgan, Deutsche Bank and Bank of America are the main players in the complex marketplace.

Longer-term, Bove said, the message is clear. The government, because of an implicit guarantee that it would never let such a large institution like JP Morgan fail, does not want so much risk sitting on the balance sheet of one bank.

In its latest quarterly statement, JP Morgan said that through the end of March it was owed $87 billion in derivatives payments at a future date by parties it has dealt with. Derivatives involve an exchange of payments over the duration of the contract, ranging from a few months to several years.

Still, the market is already changing.

A senior swaps trader on Wall Street said as interest rate swaps and other derivatives products become more commoditized, "top dealers will chip away at (JP Morgan's) business."