Svenwulf
10-02-2006, 01:42 PM
i know im completely paranoid- this is all just propaganda. personally, however, i have never won betting against greed:
Amaranth’s Effect On The Markets
By Dr. Richard S. Appel
www.financialinsights.org (http://www.financialinsights.org/).
October 2, 2006
September 29, 2006 – The natural gas market has provided a roller coaster ride of profits and losses for those investing or speculating in it. It began 2005 below $6.00 an mcf (million cubic feet). By December, the combination of an increasingly tight inventory, a rising oil market, and the devastation produced by hurricane Katrina made it soar and set a $15.75 all-time price record.
Natural gas conceived its Bull Market in September 2001, when it arose from its $1.76 base. It is an emotional market. This can be attested to by its February 2003 temporary spike above $10.00 an mcf with its following collapse to under $4.50 several months later. Similarly, in the weeks leading up to hurricane Katrina’s unleashing her fury, it was trading in the $8.00 range. This all changed when Katrina’s winds began to build and she approached the Gulf of Mexico’s prolific oil and gas fields, and the numerous onshore storage and processing facilities that she was destined to damage or destroy.
The spot price for natural gas approached $4.00 an mcf earlier this week. By so doing it broke below its $4.39 and $4.52 lows it posted in September 2003 and September 2004 respectively. How could gas trade at nearly $16.00 an mcf as recently as nine months ago, and then fall 75% in price? I believe that the surfacing of the Amaranth hedge fund collapse sheds some light on this issue.
Amaranth had earlier success in the natural gas market. They correctly anticipated its direction and accordingly positioned themselves in a bullish fashion. To their detriment, when the market reversed course they continued to maintain their existing posture and, I’ve read, they even increased their exposure. Finally, after suffering substantial losses, they attempted to sell their enormous hedged long positions in order to survive.
To their misfortune the apparent size of their position was known by various large traders who “smelled blood in the water”. They watched while Amaranth worked in vain to exit their positions, and they likely increased their shorts which drove the market still lower. Amaranth’s plight was further exacerbated due to their need to meet forced margin calls. These latter developments increased the downward pressure on the gas market and caused Amaranth’s losses to swell. I believe that the depth to which natural gas plunged was a direct result of the unfolding of these events.
Finally, the banks and financial institutions that financed Amaranth called their loans. This forced Amaranth to sell their energy book. Interestingly, it was reportedly purchased by J.P. Morgan Chase and the Citadel Investment Group. I suspect that they were two of if not the largest shorts in the market.
With the signing of the agreement and transfer of their positions to Morgan and Citadel, Amaranth took a reported loss approaching $6 billion. Simultaneously, J.P. Morgan and Citadel were gracefully allowed to offset their enormous short positions and bank untold profits. In effect, Morgan Chase and the Citadel Group were likely let off the hook of having to repurchase their huge short positions! Further, they likely did it at a steep discount to the market. If Amaranth had not been forced into liquidating their contracts, the buying by J.P. Morgan and Citadel to close out their futures contracts would otherwise have forced the market significantly higher.
In my opinion, Citadel and J.P. Morgan Chase played the game brilliantly. They garnered huge profits while Amaranth’s investors suffered incredible losses. What is interesting is that natural gas continued to substantially decline after the reported September 20 sale of Amaranth’s holdings.
The saga is not yet over. It remains to be seen if another distressed hedge fund or entity will surface and take the natural gas market further lower. In fact, that might be the impetus behind its continuing decline.
more at: http://www.321energy.com/editorials/appel/appel100206.html
some perspective:
Published: Sunday, October 1, 2006
The Fed needs to act decisively on hedge funds
James McCusker
Herald columnist
We might have expected some sort of market reaction to the thud when the Amaranth Advisers hedge fund's portfolio crashed to the floor. The fund's managers had bet heavily in the energy market, gambling that natural gas prices would rise. When that didn't happen and prices declined instead, Amaranth had to sell off its position at a loss.
The losses were initially reported as $3 billion, later corrected to $6 billion. That wasn't enough, though, to get the attention of the financial markets, which reacted not at all.
While the markets didn't respond, there was a predictable spike in calls for hedge funds to be regulated. Newspaper editorials provided the chorus as prosecutors, politicians, and bureaucrats - driven by the usual elixir of ambition and genuine concern - demanded regulatory and Congressional action.
The regulation of hedge funds has been a financial issue almost from the day the first one was dreamt up, and certainly since the Federal Reserve had to lead a rescue expedition after the implosion of Long Term Capital Management in the late 1990s.
The LTCM collapse had some similarities to the Amaranth sinking. They both managed assets for customers wealthy enough to qualify for exemptions under Securities and Exchange Commission rules. And they both bet on the market's direction and guessed wrong.
One big difference, though, was that Amaranth lost its own money, while LTCM was a highly leveraged operation that invested, or gambled, mostly with other people's money. When the LTCM stink bomb went off, the scent carried to the halls of the Wall Street banks and investment houses that had lent it the money.
The distinction between LTCM and Amaranth is an important one when we consider regulation. Wall Street's view generally has been that if a bunch of millionaires want to get together and gamble on natural gas futures, Russian bonds, or inside straights, let 'em. If they want to borrow their gambling money in the financial markets, that is another matter.
From an economics perspective it is important that we focus hedge fund regulation on what can be, and what should be, regulated. Although the Amaranth collapse is prompting the calls for regulation, there is nothing in the regulatory rules proposed so far that would have changed anything. Amaranth would still have lost its bet and lost its money; the only difference is that we would have a government report documenting the process.
What is also significant about the Amaranth case, and which distinguishes it from LTCM beyond the leverage issue, is that it wasn't just a bunch of millionaires who lost their money. The San Diego County Employees Retirement Association pension fund, for example, had invested $175 million in Amaranth and has now lost about half of it - $85 million.
In recent years, pension managers have been increasingly attracted to hedge funds because they promised greater returns. And pension fund money changes the nature of hedge fund risk in the same way that borrowed money does - because the risk spills over to third parties and nonparticipants.
The Federal Reserve felt that it had to step in when LTCM failed because a collapse of the credit structure supporting it clearly threatened the stability of our financial markets. So the Fed used its influence to assemble a group of LTCM's creditors and refinance the operation until it could be liquidated in an orderly fashion.
LTCM, with its Nobel laureate economists and enough Ph.D. mathematicians to start its own university, proved beyond doubt that very smart people can fall in love with very dumb ideas.
But it wouldn't have been a problem if they were using and losing their own money. And that is the area we should regulate. Hedge funds should be regulated only to the extent that their investment risks spill over to non-participants or, more generally, if their bonehead schemes pose a threat to the rest of us - either through financial markets or through pension portfolios.
Up until now, calls for hedge fund regulation have looked to the Securities and Exchange Commission, and this is probably a mistake. The SEC is best at analyzing, organizing and regulating corporate information disclosure and compliance. It has virtually no experience in the area of analyzing and regulating financial operations or market risk assessment.
But the Federal Reserve does. And since the Fed is going to be the one to switch on the siren, get to the scene, and deal with the mess whenever a hedge fund goes bust anyway, it should have the responsibility for developing and enforcing the regulations.
link:http://www.heraldnet.com/stories/06/10/01/100bus_mccusker001.cfm
unmentioned refco revisited: (old article)
Watch Out, They Bite!
HOW HEDGE FUNDS TIED TO EMBATTLED BROKER REFCO USED "NAKED SHORT SELLING" TO PLUNDER SMALL COMPANIES
By DANIEL KADLEC (http://javascript%3Cb%3E%3C/b%3E:void%280%29)
Posted Wednesday, Nov. 9, 2005
Thomas Badian was expecting a package, just not this one. Standing in his doorway, smiling, he opened the envelope a courier handed to him. Then he froze, and the color drained from his face. It was over: after two years overseas, the former New York City hedge-fund operator had been located. Badian slammed the door of his posh Vienna, Austria, apartment in the heart of the city's embassy quarter--but not before being officially served with a civil lawsuit linking him to the beleaguered U.S. commodities firm Refco and tying him and Refco to a type of fraud that some argue has destroyed thousands of companies and bilked investors out of billions of dollars.
The boyish-looking Badian, 36, of East European descent, seems an unlikely key figure in a high-stakes Wall Street intrigue. Yet long-standing criminal and civil charges place Badian at the center of a scheme to lend Arizona software developer Sedona much needed operating capital, then trigger the collapse of its stock and profit from the company's demise. This pattern is also alleged in the civil suit handed to Badian on Aug. 8 in his apartment in Austria--only this time the mark was pet-supplies company Pet Quarters, based in Lonoke, Ark.
Three years ago, Badian paid a $1 million fine to settle a Securities and Exchange Commission (SEC) charge that he had manipulated Sedona's shares. Related criminal charges were filed a few months later, but by then Badian had fled. His whereabouts were recently given to U.S. Attorney Michael Garcia in New York City, whose office is handling the criminal case. Garcia's office said only that the case remains open.
Yet the Badian episode might have been forgotten if not for its ties to Refco, which last month admitted to reporting false results after hiding $430 million of uncollectible debt. Refco CEO Phillip Bennett was charged with fraud, and his company sank into bankruptcy protection within days. It turns out, plaintiff lawyers say, that Badian had been making some of his Sedona trades through Refco, which has acknowledged an SEC investigation.
Looking the other way while clients manipulated the shares of small companies through what's known as naked short selling appears to have been yet another questionable way of doing business at Refco. Short selling is legal: you borrow stock, then sell it and hope to buy it back at a lower price, profiting from the difference. But naked short selling is illegal, barring certain exceptions for brokers trying to maintain an orderly market. In naked short selling, you execute the sale without borrowing the stock. The SEC noted in a report last year the "pervasiveness" of the practice. When not caught, this kind of selling has no limits and allows a seller to drive down a stock.
more on link: http://www.time.com/time/insidebiz/article/0,9171,1126706,00.html
Amaranth’s Effect On The Markets
By Dr. Richard S. Appel
www.financialinsights.org (http://www.financialinsights.org/).
October 2, 2006
September 29, 2006 – The natural gas market has provided a roller coaster ride of profits and losses for those investing or speculating in it. It began 2005 below $6.00 an mcf (million cubic feet). By December, the combination of an increasingly tight inventory, a rising oil market, and the devastation produced by hurricane Katrina made it soar and set a $15.75 all-time price record.
Natural gas conceived its Bull Market in September 2001, when it arose from its $1.76 base. It is an emotional market. This can be attested to by its February 2003 temporary spike above $10.00 an mcf with its following collapse to under $4.50 several months later. Similarly, in the weeks leading up to hurricane Katrina’s unleashing her fury, it was trading in the $8.00 range. This all changed when Katrina’s winds began to build and she approached the Gulf of Mexico’s prolific oil and gas fields, and the numerous onshore storage and processing facilities that she was destined to damage or destroy.
The spot price for natural gas approached $4.00 an mcf earlier this week. By so doing it broke below its $4.39 and $4.52 lows it posted in September 2003 and September 2004 respectively. How could gas trade at nearly $16.00 an mcf as recently as nine months ago, and then fall 75% in price? I believe that the surfacing of the Amaranth hedge fund collapse sheds some light on this issue.
Amaranth had earlier success in the natural gas market. They correctly anticipated its direction and accordingly positioned themselves in a bullish fashion. To their detriment, when the market reversed course they continued to maintain their existing posture and, I’ve read, they even increased their exposure. Finally, after suffering substantial losses, they attempted to sell their enormous hedged long positions in order to survive.
To their misfortune the apparent size of their position was known by various large traders who “smelled blood in the water”. They watched while Amaranth worked in vain to exit their positions, and they likely increased their shorts which drove the market still lower. Amaranth’s plight was further exacerbated due to their need to meet forced margin calls. These latter developments increased the downward pressure on the gas market and caused Amaranth’s losses to swell. I believe that the depth to which natural gas plunged was a direct result of the unfolding of these events.
Finally, the banks and financial institutions that financed Amaranth called their loans. This forced Amaranth to sell their energy book. Interestingly, it was reportedly purchased by J.P. Morgan Chase and the Citadel Investment Group. I suspect that they were two of if not the largest shorts in the market.
With the signing of the agreement and transfer of their positions to Morgan and Citadel, Amaranth took a reported loss approaching $6 billion. Simultaneously, J.P. Morgan and Citadel were gracefully allowed to offset their enormous short positions and bank untold profits. In effect, Morgan Chase and the Citadel Group were likely let off the hook of having to repurchase their huge short positions! Further, they likely did it at a steep discount to the market. If Amaranth had not been forced into liquidating their contracts, the buying by J.P. Morgan and Citadel to close out their futures contracts would otherwise have forced the market significantly higher.
In my opinion, Citadel and J.P. Morgan Chase played the game brilliantly. They garnered huge profits while Amaranth’s investors suffered incredible losses. What is interesting is that natural gas continued to substantially decline after the reported September 20 sale of Amaranth’s holdings.
The saga is not yet over. It remains to be seen if another distressed hedge fund or entity will surface and take the natural gas market further lower. In fact, that might be the impetus behind its continuing decline.
more at: http://www.321energy.com/editorials/appel/appel100206.html
some perspective:
Published: Sunday, October 1, 2006
The Fed needs to act decisively on hedge funds
James McCusker
Herald columnist
We might have expected some sort of market reaction to the thud when the Amaranth Advisers hedge fund's portfolio crashed to the floor. The fund's managers had bet heavily in the energy market, gambling that natural gas prices would rise. When that didn't happen and prices declined instead, Amaranth had to sell off its position at a loss.
The losses were initially reported as $3 billion, later corrected to $6 billion. That wasn't enough, though, to get the attention of the financial markets, which reacted not at all.
While the markets didn't respond, there was a predictable spike in calls for hedge funds to be regulated. Newspaper editorials provided the chorus as prosecutors, politicians, and bureaucrats - driven by the usual elixir of ambition and genuine concern - demanded regulatory and Congressional action.
The regulation of hedge funds has been a financial issue almost from the day the first one was dreamt up, and certainly since the Federal Reserve had to lead a rescue expedition after the implosion of Long Term Capital Management in the late 1990s.
The LTCM collapse had some similarities to the Amaranth sinking. They both managed assets for customers wealthy enough to qualify for exemptions under Securities and Exchange Commission rules. And they both bet on the market's direction and guessed wrong.
One big difference, though, was that Amaranth lost its own money, while LTCM was a highly leveraged operation that invested, or gambled, mostly with other people's money. When the LTCM stink bomb went off, the scent carried to the halls of the Wall Street banks and investment houses that had lent it the money.
The distinction between LTCM and Amaranth is an important one when we consider regulation. Wall Street's view generally has been that if a bunch of millionaires want to get together and gamble on natural gas futures, Russian bonds, or inside straights, let 'em. If they want to borrow their gambling money in the financial markets, that is another matter.
From an economics perspective it is important that we focus hedge fund regulation on what can be, and what should be, regulated. Although the Amaranth collapse is prompting the calls for regulation, there is nothing in the regulatory rules proposed so far that would have changed anything. Amaranth would still have lost its bet and lost its money; the only difference is that we would have a government report documenting the process.
What is also significant about the Amaranth case, and which distinguishes it from LTCM beyond the leverage issue, is that it wasn't just a bunch of millionaires who lost their money. The San Diego County Employees Retirement Association pension fund, for example, had invested $175 million in Amaranth and has now lost about half of it - $85 million.
In recent years, pension managers have been increasingly attracted to hedge funds because they promised greater returns. And pension fund money changes the nature of hedge fund risk in the same way that borrowed money does - because the risk spills over to third parties and nonparticipants.
The Federal Reserve felt that it had to step in when LTCM failed because a collapse of the credit structure supporting it clearly threatened the stability of our financial markets. So the Fed used its influence to assemble a group of LTCM's creditors and refinance the operation until it could be liquidated in an orderly fashion.
LTCM, with its Nobel laureate economists and enough Ph.D. mathematicians to start its own university, proved beyond doubt that very smart people can fall in love with very dumb ideas.
But it wouldn't have been a problem if they were using and losing their own money. And that is the area we should regulate. Hedge funds should be regulated only to the extent that their investment risks spill over to non-participants or, more generally, if their bonehead schemes pose a threat to the rest of us - either through financial markets or through pension portfolios.
Up until now, calls for hedge fund regulation have looked to the Securities and Exchange Commission, and this is probably a mistake. The SEC is best at analyzing, organizing and regulating corporate information disclosure and compliance. It has virtually no experience in the area of analyzing and regulating financial operations or market risk assessment.
But the Federal Reserve does. And since the Fed is going to be the one to switch on the siren, get to the scene, and deal with the mess whenever a hedge fund goes bust anyway, it should have the responsibility for developing and enforcing the regulations.
link:http://www.heraldnet.com/stories/06/10/01/100bus_mccusker001.cfm
unmentioned refco revisited: (old article)
Watch Out, They Bite!
HOW HEDGE FUNDS TIED TO EMBATTLED BROKER REFCO USED "NAKED SHORT SELLING" TO PLUNDER SMALL COMPANIES
By DANIEL KADLEC (http://javascript%3Cb%3E%3C/b%3E:void%280%29)
Posted Wednesday, Nov. 9, 2005
Thomas Badian was expecting a package, just not this one. Standing in his doorway, smiling, he opened the envelope a courier handed to him. Then he froze, and the color drained from his face. It was over: after two years overseas, the former New York City hedge-fund operator had been located. Badian slammed the door of his posh Vienna, Austria, apartment in the heart of the city's embassy quarter--but not before being officially served with a civil lawsuit linking him to the beleaguered U.S. commodities firm Refco and tying him and Refco to a type of fraud that some argue has destroyed thousands of companies and bilked investors out of billions of dollars.
The boyish-looking Badian, 36, of East European descent, seems an unlikely key figure in a high-stakes Wall Street intrigue. Yet long-standing criminal and civil charges place Badian at the center of a scheme to lend Arizona software developer Sedona much needed operating capital, then trigger the collapse of its stock and profit from the company's demise. This pattern is also alleged in the civil suit handed to Badian on Aug. 8 in his apartment in Austria--only this time the mark was pet-supplies company Pet Quarters, based in Lonoke, Ark.
Three years ago, Badian paid a $1 million fine to settle a Securities and Exchange Commission (SEC) charge that he had manipulated Sedona's shares. Related criminal charges were filed a few months later, but by then Badian had fled. His whereabouts were recently given to U.S. Attorney Michael Garcia in New York City, whose office is handling the criminal case. Garcia's office said only that the case remains open.
Yet the Badian episode might have been forgotten if not for its ties to Refco, which last month admitted to reporting false results after hiding $430 million of uncollectible debt. Refco CEO Phillip Bennett was charged with fraud, and his company sank into bankruptcy protection within days. It turns out, plaintiff lawyers say, that Badian had been making some of his Sedona trades through Refco, which has acknowledged an SEC investigation.
Looking the other way while clients manipulated the shares of small companies through what's known as naked short selling appears to have been yet another questionable way of doing business at Refco. Short selling is legal: you borrow stock, then sell it and hope to buy it back at a lower price, profiting from the difference. But naked short selling is illegal, barring certain exceptions for brokers trying to maintain an orderly market. In naked short selling, you execute the sale without borrowing the stock. The SEC noted in a report last year the "pervasiveness" of the practice. When not caught, this kind of selling has no limits and allows a seller to drive down a stock.
more on link: http://www.time.com/time/insidebiz/article/0,9171,1126706,00.html