Here's a primer on the latest firm that crushed your portfolio: Glencore

So there’s a company you may never have heard about, that in the next week or so could bring much pain to your portfolio and derivatives markets around the world.

Here’s how the company — Glencore — describes itself:

We are one of the world’s largest diversified natural resource companies, producing and marketing more than 90 commodities, with a network that spans over 50 countries
and around 181,000 people.

Anthony Hayward is the Non-Executive Chairman of Glencore. You may remember Hayward as the CEO of BP during the Gulf oil spill — the worst environmental disaster in history.

Well Hayward is now involved in what could be the worst derivative market meltdown in history.

So here is another What we do at Glencore:

Glencore is a leading integrated commodity producer and marketer, operating worldwide. Our business covers over 90 commodities encompassing
metals & minerals, energy products and agricultural products as well as related marketing and logistics activities.

So Glencore is a huge global player in commodities, which in this deflationary environment have seen their prices crater. Crude oil, coal, copper, iron ore and gold. All these materials have seen prices falling for the last six months, at least.

Over the last year Glencore’s stock price is down 79%, since its 2011 IPO the stock is down 87%. But if it was just an equity wipe out, all would be well except for the investors. A Sept. 16 secondary  offering on the equity side is already down almost 50% in two weeks.

Like AIG and Lehman before it,  Glencore uses overnight lending as liquidity for its commodity trading desks. Well, with a stock performance like this and credit default swaps soaring to Lehman-like levels, Glencore’s going to come crashing down like a house of cards within days as liquidity dries up.

Now of course no one — including Glencore or the Swiss government, where it is based — knows exactly how horrific a take down would be. The second or third derivative to fall on the bankruptcy is anybody’s guess. Think Lehman Bros taking out AIG. And an unwinding of its book is unthinkable due to size and scope.

So that’s the back story on a smallish commodity player going belly up and the shock waves rippling across the globe.

This post should be far more relevant come Wed. or Thurs. of this week. But I thought you would want to know now.


Maiden Lane III

Treasury chief Tim Geithner will probably not have to worry about still having his Westchester, NY house sitting empty all this time.

Geithner will probably need a home in the New York area once he is bounced from Washington over his latest problem.

It appears from the little paperwork that could be released on the creation of Maiden Lane II and Maiden Lane III by the New York Fed while Geithner was the president, that he authorized the backdoor bank bailout of Wall Street through AIG.

AIG paid 100% on all these CDOs regardless of the traunche or value. This was done at the insistence of the NY Fed and Geithner.

Now the White House has come out and publicly backed Geithner — for the fifth time since hes was designated. This has to be getting old for Rahm Emanuel and Larry Summers.

Geithner does not have the pedigree to keep him in the job. I believe he was appointed to Treasury because of this bailout.

Yes his grandfather was an adviser to Eisenhowser. Yes he worked for the IMF and the World Bank. Yes he worked for Henry Kissinger.

But no he has no ties to the bankers on The Street. He also has no political power base in Washington. He was used as a pawn and will pay the price by President’s Day.

JPMorgan Chaste


JPMorgan’s Jamie Dimon comes out this week and says his firm will bail out California with a $1.5B loan. The other terms of the loan were not mentioned.

California was paying 3.75% on the IOUs it issued. I believe the rate is lower but have no way of knowing. JPMorgan is using its trading profits to boost its municipal funding business with this loan.

There was a trading arbitrage there with scammers paying 90% on face to people and then cashing in with the state.

Dimon says the firm has a “social responsible” to help California. I guess if Wall St. didn’t make California the poster state for subprime loans and the housing crisis, then Dimon’s magnanimous gesture would not be needed.


Why stocks moved higher this week shows that the “trading bubble” is moving to its extreme and will probably begin its slow leak after Labor Day.

The move up was despite China’s huge 5 percent market correction and higher than expected weekly jobless claims and a higher revision to two weeks ago.

The Fed’s policy of stepping out the 10-year rate at 3.5 percent is keeping equities buoyant and on par for the same return. This cannot continue for a length of time.


AIG CEO Robert Benmosche promises to pay back Uncle Sam with interest only three days in office.

The former CE of MetLife said from his Croatian vacation destination.

The stock popped 21 percent on the news. Not sure what Benmosche was smoking in Eastern Europe, but this labyrinth of a balance sheet chuck full of exotic derivatives, with the total impact of this toxic paper is truly unknowable.

how rich.
For more on Wall and Washington and the economy see:

Paulson and Bernanke: Mum’s The Word


According to BofA chief Ken Lewis’s testimony, Ben Bernanke and Hank Paulson, suspended all financial reporting rules to BofA shareholders by the CEO.

Lewis in a deposition before NYS AG Andrew Cuomo’s office said he was told by Bernanke and Paulson the they wanted no public disclosure on the Merrill Lynch deal for fear of a further financial collapse due to the train wreck that was Merrill’s balance sheet.

The next question would be what other regulation or laws were suspended during this economic crisis?

Did Paulson and Bernanke–– through the Plunge Protection Team (President’s Working Group on Financial Markets) –– speak with market participants on mergers and bankruptcies prior to public disclosure? I would have to say yes.

Many weekends in October, November and December there were meetings at Tim Geithner’s  NY Fed offices to repair the week that pasted. Market manipulation on credit derivatives during this period was the ruination of AIG.

I have written in the past about that there was a threat in September of martial law in the days after Lehman Bros’s collapse. That was just before the feds bailed out the money market with guarantees so the market would not crash.

The propping up of AIG is probably another creation of Ben and Hank to have a second access point to bail out the banks should it be needed.

I am sure this is the tip of the iceberg as far as manipulation and suspension of rules were used in the name of “national security.”  That is the defense Ben and Hank will probably use should this amount to any prosecution.

For more on Wall and Washington and the economy see:

AIG Held A Gun To Treasury


Paying off AIG’s bonuses may have save the US taxpayers as much as $1.6T in losses.

According to internal AIG documents, which were supplied to Treasury chief Tim Geithner late last week, if AIG chose to renege on paying the $165 million bonuses, then the trouble insurer could be in technical default on most of its derivatives.

The white paper stated: “AIG Financial Product’s derivatives portfolio stands at about $1.6 trillion and remains a significant risk. Failure to pay the required retention payments [bonuses] therefore could have very significant business ramifications.”

The document went on to layout: “A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.”

During AIG CEO Ed Liddy’s Congressional testimony there was no mention of this trigger by any participants, just mea cuplas on having to pay them.

Since the bonuses are said to be paid, with Congress then wanting to claw back the bonuses through a 90-percent tax rate, it appears the derivative language was an important consideration.

Some additional clarity came to light late this week into the murky pool of toxic paper residing on AIG’s balance sheet.

Wall St banks including AIG began selling mortgage-backed securities (MBS), which were regulated, marked up with a housing appreciation of 2- to 3 percent. Hedge funds and global investors quickly grasped the value-added potential in capital expansions, commissions garnered, and multiple resale opportunities for these collateralized debt obligations (CDOs).

The appetite of global investors for these derivatives could not the satisfied with prime loans, so Wall St. and AIG in particular lowered the quality of the mortgages toward subprime loans to keep the pump primed.

In order to cover the higher-risk paper, returns were increased to 15 percent – 18 percent, AIG began offering credit default swaps (CDSs), which are unregulated, at the same time that housing prices began to slide.

To keep investors funding this scheme the CDSs were used to bridge the gap as “an almost insurance policy“ against losses on MBSs.

As home prices cratered, global investors including Chinese government and Middle Eastern sovereign wealth funds feasted on CDSs to hedge their exposure.

AIG was a major player in both these markets. Selling MBSs and CDSs for pennies on the dollar, which could not cover growing “claims“ on these derivatives.

In order to discover the true value of Liddy’s admitted $1.6T notational or face value on the derivatives, the underlying value of the homes making up the toxic paper, needs to be priced at proper valuations through proper assessment tools.

Mortgage industry sources are suggesting that the government needs to tear apart the bundled paper and examine each asset using assessment professionals –– not statistical data –– to arrive at that present value. Then the CDOs can be priced.

For more on Wall and Washington and the cratering economy see: