ZeroHedge.com | Small Chinese Company Tells Goldman To Take A Hike, Refuses To Pay $80 Million In Derivative Losses

Submitted by Tyler Durden on 12/29/2009 11:53 -0500

It appears that even after thoroughly dominating the US legislative, judicial and executive branches, the long tentacles of the squid have been no better than the Mongolian hordes at overcoming the Chinese Wall (which is ironic seeking how easy it is to ignore the same construct internally between the firm's prop and flow traders...and yes, we will be posting our response to Goldman shortly, we have not forgotten). In the meantime, half a world away, a small Chinese power generator, Shenzhen Nanshan Power, is blatantly refusing to honor contracts with Goldman Subsidiary J. Aron for $80 million in derivative losses, and it appears that China itself has decided to stand behind the small company.

Reuters reports:

Shenzhen Nanshan Power (000037.SZ) (200037.SZ) said in a statement that it received several notices from J. Aron & Company, a trading subsidiary of Goldman Sachs (GS.N), for at least $79.96 million as compensation for terminating oil option contracts.

"We will not accept the demand by J. Aron for all the losses and related interests," said Nanshan, in line with the stance it took last December.

"We will try our best to negotiate with J. Aron and resolve the dispute peacefully...but the possibility of using a lawsuit can not be ruled out when talks fail," it added.

"J. Aron told us in one notice that if we do not pay the money, they will reserve the right to launch a lawsuit and will not send us any further notice."

The State Assets Supervision and Administration Commission said in September that it would back state-owned companies in any legal action against the foreign banks that sold them oil derivatives, which resulted in losses when oil prices dived late last year. [ID:nPEK14474]

A Beijing-based Goldman Sachs corporate communication official declined to comment.

Not sure what Hank Paulson's former firm would comment: alas the Chinese communist party still has to be filled with Goldman alumni. That being said, this is precisely the track that Goldman has been focusing on for the past few years. At this point, the firm realizes all too well that dominating power politics in China in the near futures is far more critical than complete control over D.C., as there is little the world's most important company can do domestically in the context of taxpayer capital transfer without a full fledged revolution.

Princeton Economist and Computer Scientists Show that Derivatives Are Inherently Vulnerable to Fraud

December 24, 2009

As I have previously noted, credit default swaps are destabilizing for the economy. See this and this.

Now, Princeton University economists and computer scientists have demonstrated that financial derivatives are also inherently vulnerable to fraudulent pricing.

PhysOrg summarizes Princeton's findings:

In a result that may have implications for financial regulation, researchers from computer science and economics have revealed potentially impenetrable problems with the pricing of financial derivatives. They show that sellers of these investments could purposefully include pieces of bad risk that no buyer could detect even with the most powerful computers.

The research focused on collateralized debt obligations, or CDOs, an investment tool that combines many mortgages with the promise of spreading out and lowering the risk of default. The team examined what would happen if a seller knew that some mortgages were "lemons" and structured a package of CDOs to benefit himself. They found that the manipulation may be impossible for buyers to detect either at time of sale or later when the derivative loses money.

The team consists of Sanjeev Arora, director of Princeton's Center for Computational Intractability, his colleague Boaz Barak, economics professor Markus Brunnermeier, and computer science graduate student Rong Ge.

It is now standard wisdom that a major culprit in the 2008 financial meltdown was use of simplistic mathematical models of risk at financial firms. This paper, released as a working draft Oct. 15, suggests that the problems may go deeper.

"We are cautioning that even if you have the right model it's not easy to price derivatives," Arora said. "Making the models more complicated will not make these effects go away, even for computationally sophisticated."

Arora noted that the problem arises from asymmetric information between buyers and sellers, and goes against conventional wisdom in economic theory, which holds that derivatives reduce the negative effects of such unequal information.

"Standard economics emphasizes that securitization can mitigate the cost of asymmetric information," Brunnermeier said. "We stress that certain derivative securities introduce additional complexity and thus a new layer of asymmetric information that can be so severe it overturns the initial advantage."

Brunnermeier noted that the finding came from combining computer science and finance, which has not been done before but has the potential for further insights. “I anticipate that both fields can enrich each other,” he said.

http://www.georgewashington2.blogspot.com/

Wall Street Pit | Hedge Fund Paulson & Co to Launch Gold Fund - investing in gold-related shares and gold derivatives aiming to outperform gold prices

Nov 18, 2009, 1:53 PM

Hedge fund manager John Paulson, who raked in $20 billion in 2007 by betting against financials and all things subprime, is looking to grow his gold stash with a new fund, tapping into investor concern about a weak U.S. dollar and inflation.

Mr. Paulson, who spoke about the fund at a meeting with his investors in New York, argued that the bull run was only beginning for the precious metal. He said he was starting it in part to give himself more personal exposure to gold.

Mr. Paulson currently has more than 10% of his $30 billion or so under management in gold-related investments, according to his investors. He is estimated to be worth about $6 billion, and plans to invest as much as $250 million of his own money in the new fund. FULL STORY>>>

Investment Watch | JPMorgan CAUGHT RED-HANDED BY FBI FOR USING DERIVATIVES TO STEAL FROM SCHOOLS AND CITIES

Link: http://www.bloomberg.com/apps/news?pid=20601014&sid=aIL9gsK5wG40

Example 1: JPM made more money than it paid out for Erie, Pennsylvania School District=
School Got = $755,000 and JPM collected $1.2 million in fees.

Example 2: JPM made over $4 Million on Philadelphia Intern Airport $6.5 Million Derivative
In SEC testimony “They’re about getting fees and getting the most fees they can get.” that is 10 X Cost of a bond issue. JPM bankers then gave $280,000 to Airport Executive’s school district for signing Contract.

Five JPM derivative bankers are targets in investigation of banks conspiracy to overcharge local governments!

How Fees Are Hidden: JPM locked in FEES selling a Mirror-Image Swap Contract on open market for MUCH Higher Amount.

FEES are hidden in Derivatives and then skimmed into the pockets to maximize Employee incomes?

JPM made that a common practice (FBI Case) and we know G0LDMAN does it also!

JPM+G0LDMAN routinely Hides fees for Derivative Contracts public records show.
_______________________

HOW HIDDEN FEES IN DERIVATIVES SCAMS WERE USED TO STEAL THE FUTURE
- VERIFIED BY FBI investigation of JPM!

Having worked with CPA’s and Managers Building Complex Math Models all my life I have some insight into what Bankers and their PhDs did in creating LUCRATIVE DERIVATIVES! Retired now!

Question Bankers had was how to increase Salaries/Bonuses to $Tens/Hundreds of Millions using Derivatives.

Buying&Repackaging&Selling mortgages could not provide enough PROFIT MARGIN for MASSIVE INCOMES!

Bankers decided to “STEAL the FUTURE” using statistical+mathematical Projections of Housing Hyper-Inflation (2003-06 PEAK)!
__________ __________ _____

HOW Banksters stole OUR FUTURE!

Look under the HOOD of a Derivative= a bunch of mortgages sliced and packaged together+HIDDEN FEES

1. Used Math Models to Project Housing Hyper-Inflation 2003-2006 forward TEN+Years.

2. Add Projected Growth in Fees to Cost of Derivatives-Capturing FUTURE GAINS.

3. SKIM off FEES into Executive/Employee Incomes!

4. Sell FEE Laden High Risk Derivatives as Fake Rated “AAA” Low Risk paper.

Derivative begin life at say 50% of FACE VALUE (projected hyper-inflated future value)

Reason Derivatives are worth Near ZERO after housing dropped less than 50%.

Derivatives should be worth 50% but NO! NEAR ZERO!

Simple Models to STEAL AMERICA’S FUTURE resulted in Hidden “Off-Balance-Sheet” Toxic Derivatives according to 0ffice of Comptroller of Currency, 0CC, quarterly Report:

1 JPM0RGAN $81TRILLION in Toxic Derivatives
2 BofA $78TRILLION
3 G0LDMAN $48TRILLION
4 M0RGAN $39TRILLION
5 C1T1GROUP $32TRILLION

http://www.occ.gov/ftp/release/2009-72a.pdf
Page23!

Progressive.org | House Dems Warp Financial Oversight Board

So, after Wall Street destroyed the U.S. economy by gambling on derivatives, the Democrats in Congress still are failing to muster the necessary backbone to thoroughly regulate them. What Sen. Durbin said of Congress a few months ago is ...

Climate Invest | Derivatives: "Cap and Trade Could Be a Boon to New York"

RGEMonitor.com | The Snowball of Derivatives: The Specter of a Second Black Swan

Oct 21, 2009 - Banking sector consolidation (via acquisition of failed banks) and the generalized bailout of bondholders, actions both promoted by governments, have aggravated the problems of “too big to fail” and “moral hazard”. Hence incentives for reckless behavior have actually heightened.

So far there has been lots of talk within the G-20 and other forums but little action to tackle the problem at national and especially at transnational levels. As Nouriel Roubini and others have pointed out, one could argue that systemic risks have in fact increased relative to the pre-crisis period. A follow-up financial meltdown would be devastating. Governments should not only hope for the best but act swiftly to forestall the worst .The arrival of a Taleb’s second black swan on stage would mean complete chaos.

Governments should urgently agree on binding disclosure, oversight and enforcement of tighter rules on derivatives at the national and supra-national level. If only for the simple reason that now their fiscal and monetary leeway for future financial rescues is much diminished. After the first round of bail outs, debt to GDP levels of developed countries already exceed 100% of GDP and nobody really knows what the ratios would be if all guarantees and unfunded liabilities were to be brought above the line.

Derivatives were the invisible 800-pound gorilla in the room. After accounting for them - even abstracting from counterparty risks - leverage ratios were a multiple of those reported in the books .It was the failure of Lehman Bros that drew the attention to the ultimate implications of this huge snowball rolling down the hill .In the eve of the bankruptcy of Lehman, the International Swap and Derivatives Association.....

AlterNet.org | The Battle Against Letting Wall Street Continue to Make a Killing on Derivatives

Corporate Accountability and WorkPlace: Protections for consumers and Wall Street's skullduggery are at stake in an obscure series of hearings going on in Congress right now. No wonder Warren Buffett called them "financial weapons of mass destruction."....

ChinaDaily.com.cn | Read with right attitude, enough intelligence

By Zhu Yuan (China Daily)
Updated: 2009-10-21 07:46

No one would ever challenge the consensus that lessons learned from the past should be a guide for the future. But can we humans as a whole really learn lessons from what has happened? Even if we sometimes can, it is not that easy.

The discussion about the cause or causes for the current financial crisis will definitely continue even years after the world economy completely recovers. In spite of many books or essays that have already been published offering explanations or understanding of the crisis, the views vary about the very root cause. The government bailout plans can hardly be believed to be the right remedy to eradicate the cause of the disease if it can be described thus.

In the circumstances, some tend to believe that there is a conspiracy behind the crisis, with a view to getting control of the world's wealth. The book The War of Currency written by a Chinese, who has studied abroad and worked in financial institutions in the United States, unfolds a picture of how such a conspiracy has been working in the past more than three centuries.

The book was published in June 2007, more than a year before the financial crisis broke out. The fact that the writer Song Hongbing precisely predicted the sub-prime crisis has made the book even more popular. With sales of more than 1.6 million copies, not to mention the millions of pirated ones, the book has been a best-seller in the past two years.

By taking control of the distribution of US dollars, the international bankers with the Rothschild family behind them are actually attempting to bring the entire world under control by the rotating of inflation and deflation, according to the writer. The current financial crisis is part of the conspiracy.

Some may choose to believe what this book says. But I consider it as a legendary tale, a good one, which has established connections between the conspiracy of the Rothschild family and almost all world events such as the two world wars and the collapse of the Soviet Union and the current financial crisis.

Can this be true? I cannot tell.

We Chinese have a saying that it is better not to read any book if one tends to trust all what one has read while some ancient Chinese sages also believe that one can benefit from any book if with the right attitude and enough intelligence. That is to know what to learn from, what to laugh away and what to just skim over without wasting one's attention.

Then it should be no problem to read this book. At least, as laymen to finance or the operation of financial capital, readers may learn some basic knowledge about this particular field and its history as well. They may also get to know something about how capitalists make profits by speculation in the capital markets.

Even if I can hardly be convinced what the book says is true, there is one thing I feel for sure - there should be a limit to the way and scope capitalists create financial products such as derivatives to make profits. The reason is simple: The money they make will come from other people or there will be inflation, and it is the majority in the public who suffer. There can never be such a situation where financial derivatives are able to bring a fortune to most people.

zhuyuan@chinadaily.com.cn

Wall Street Journal | Derivatives Panel Declares Default On MGM Loans; Auction To Come

OCTOBER 20, 2009, 10:59 A.M. ET - NEW YORK (Dow Jones)--Derivatives dealers voted Tuesday that Metro-Goldwyn-Mayer Inc.'s failure to meet last month's loan interest payment has triggered contracts insuring holders against default....

ZeroHedge.com | Hedgefundgate Begins: Numerous Insider Trading Charges Forthcoming

Rajmahal was just the beginning. The Sri Lankan, who just made the record books for spending a generous $100 million on bail and has even bigger digs in New York's Sutton Place complex (although not quite Richard Perry big), is just the proverbial appetizer. And if regulators have truly decided to start treating the hedge fund industry like the 21st century equivalent of organized crime (which they have as previously disclosed by the US attorney), tonight many other wannabe billionaires are not sleeping too well (and even considering checking out Expedia for some sweet one-way trip deals). Because if they are not, they will be after reading the most recent take on their upcoming plight. From Bloomberg: "Federal investigators are gearing up to file charges against a wider array of insider-trading networks, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said." If nothing else, this will hopefully force many of them to reevaluate the nomenclature of what funds to allocate the hundreds of billions of dollars that have emerged from the "sidelines" recently: it would appear The Insider Trading Rapid Value Appreciation Offshore Fund, most recently developed at Shady Pickins Asset Management (SPAM L.P.), may not be the best appellation after all.....

AlterNet.org | Nobel Committee Admits Getting into Derivatives Trading in Giving Peace Prize to Obama

A spokesman from the Nobel Committee yesterday spoke on condition of anonymity about the controversial decision to award the Nobel Peace Prize to President Obama, who as yet has solved no international crisis or created peaceful resolution to any conflict but has delivered some awesome speeches that have breathed new life into the Norwegian stock exchange, the Red Herring 500, according to the committee member. "There's derivatives trading now in virtually every commodity known to humankind," noted the source. "So why not peace?" He added that rare commodities with unpredictable futures are particularly attractive to derivatives traders, and that peace certainly falls into that category.

Financial Industry Regulatory Authority set to fine Citigroup Inc $600,000 over derivatives transactions in part designed to help foreign clients

UK.Reuters.com | China state firms told to hold cash, hedge carefully

Mon Oct 12, 2009 4:37am BST

BEIJING, Oct 12 (Reuters) - China's biggest state firms must highlight that "cash is king" in their 2010 budgets and control trading in financial derivatives, China's state asset watchdog said.

The State-owned Asset Supervision and Administration Commission (SASAC) gave few details about its plans for derivative losses made by China's state firms [ID:nSP69447].

But SASAC said in a notice issued over the weekend that it did not want state firms to speculate in derivatives in 2010.

"Any budget for financial derivatives should stick to the principal of risk hedging, and any trading scale must be in line with spot market budget and risk affordability," it said.

China's state firms should stick to prudent financial policies and be prepared for "tough days" in 2010 because of uncertainties at home and abroad, SASAC said.

SASAC has put pressure on state firms after several, including Air China (601111.SS: Quote, Profile, Research) (0753.HK: Quote, Profile, Research) and China Eastern (600115.SS: Quote, Profile, Research), reported huge derivatives losses as the global financial crisis intensified.

It also rattled foreign banks by saying companies within its stable could launch lawsuits over losses on over-the-counter derivative trades.

For scenarios about how the dispute may play out, please click on [ID:nSP96058]; for a Q&A on the situation, please click on [ID:nSP415840]. For more, click [ID:nSP486856]

SASAC was set up in 2003 to oversee the biggest non-bank state-owned enterprises, usually parent companies of the largest listed firms such as PetroChina (0857.HK: Quote, Profile, Research) (601857.SS: Quote, Profile, Research) (PTR.N: Quote, Profile, Research), Sinopec (0386.HK: Quote, Profile, Research) (SNP.N: Quote, Profile, Research) (600028.SS: Quote, Profile, Research), Chalco (2600.HK: Quote, Profile, Research) (601600.SS: Quote, Profile, Research) and China Mobile (0941.HK: Quote, Profile, Research) (CHL.N: Quote, Profile, Research). (Reporting by Zhou Xin and Tom Miles; Editing by Ken Wills)

Market Ticker | China Defaults, Currency Basket Threatens Dollar

Robert Fisk exposed revived discussions by the Gulf States, China, France, Japan, Brazil, and Russia to replace the dollar as the benchmark oil trading currency with a basket of currencies including gold within 10 years. This proposal is not new and discussions have been ongoing for decades. But other extraordinary moves in the capital markets suggest we should take this threat to the dollar’s position very seriously. For example, China has $2.3 trillion in currency reserves (about 70% in dollars), and China knows how to get its way.

In November 2008, Chinese banks said they would no longer play by our rules. Top tier banks (Bank of China and Industrial and Commercial Bank of China) reneged on derivatives contracts. They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation. This should have been headline news in every financial newspaper, but it wasn’t.

Chinese banks defaulted. They may have been partially motivated by U.S. malfeasance in the capital markets that caused losses in Asia. The U.S. squandered its credibility and our cover-ups have done nothing to restore it.

Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties. Everyone was forced to renegotiate contracts with the Chinese banks.

From the perspective of the derivatives markets, this is earth shattering. What would have happened if AIG had done the same thing? (Hey, Goldman, UBS, and others…you want your collateral? Well…Stuff It!)

At the end of August 2009, China signaled that state owned oil consumers: Air China, COSCO, and China Eastern could default on money-losing commodities derivatives contracts.

If we had been paying attention, the U.S. should have done everything in its power to correct our mistakes, clean up the mess in our financial system—instead of sweeping it under the carpet—and turned our efforts to maintaining the credibility of the capital markets and the credibility of the dollar.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

SeekingAlpha.com | Janet Tavakoli Talks Fraud, Derivatives and Bankruptcy

WashingtonBlog | Expert on Structured Finance and Derivatives Gives the Big Picture ...

Janet Tavakoli is one of the foremost experts on structured finance and derivatives. Tavakoli made an outstanding presentation to the IMF last week on the fraud which led to the financial crisis. Tavakoli was kind enough to send me a ...

BEIJING, Sept 29 (Reuters) | SCENARIOS-What will come of the China derivatives tussle?

SeekingAlpha.com | Morgan Stanley Sued Over a Bad Derivative Bet

Despite claims by the Obama regime, and the continual reassurances from the media propagandists that the U.S. financial sector has been “saved” through re-inflating the financial sector bubble with $10 trillion in hand-outs/loans/guarantees, the reality is that nothing has been fixed. Two other news items provide further context for this fact.....

SeekingAlpha.com | House Agriculture Chairman Eager to Regulate Derivatives

September 27, 2009 - Cargill and the National Rural Electric Cooperatives Association (NRN) said Sept. 18 that proposed regulation of financial derivatives could make it harder for them to do business, but House Agriculture Committee Chairman Collin Peterson, D-Minn., said he thinks the issues for “end users” can be resolved and that he is determined to tighten up on derivatives because their misuse was a key element in last year’s financial crisis. . . .

Peterson said at the hearing he wants to make changes in the proposal to avoid higher costs, but he added, “We are not going back to the system we had before. I want to make sure the risk out there is going to be borne by the people doing the business, not by the government.” Peterson also told reporters he fears the “big players” — big banks that sell derivatives — are trying to get exemptions. . . .Full Story