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might be familiar with Amaranth LLC, the giant hedge fund that collapsed last fall, afterward blowing up $6 billion of investors' money. It now comes out that the circumstances below which they self-destructed are worth learning.
But first A METAPHOR
What would happen if you had a grief in your chest, and you had tests taken at your doctor on a Monday who you have known and trusted for 30 annuals? He tells you that the results will differentiate you if you are going to live or dead, no in between. You now visit the doctor on a Friday to argue the results. The doctor says to you how would you like to bet on the results.
You attempt to bet $1 million that you are going to live. The doctor says, I will take your bet myself. Would you still make the bet? The response is no, of way you wouldn't for the doctor already knows the outcome. and you don't. It's favor betting against the house in Las Vegas when the house already KNOWS how the results will rotate out.
This namely the same position in our attitude that Amaranth the hedge fund faced during its trading crisis. Hedge funds must book their trades through a clearing tight [link widoczny dla zalogowanych], no differ than many important brokerage firms clearing trades for smaller brokerage firms. The smaller fixed pays a fare to the bigger firm that clears the trades for them.
In the case of Amaranth the hedge fund, JP Morgan was the removing broker, known as a Prime Broker. In marrow Amaranth made bets above the vigor futures markets, and these bets went the erroneous direction. As a hedge fund, Amaranth uses leverage when it trades against its equity, usually lending approximately 6 to 1, and sometimes as tall as 8 to 1. JP Morgan as the removing broker was the lender of the additional margin.
Now when a commerce goes against a hedge fund, the fund may be called above along the clearing firm to put up more margin, meaning money, or securities to protect the clearing firm. In this case the problem happened on a Friday. Amaranth ambitioned to get rid of billions of dollars of toxic bad trades at giving them to Goldman Sachs, who agreed to take them if Amaranth would give Goldman $2 billion in cash onward with the trades. Goldman would then suppose the hazard of what happens to those trades. Amaranth wanted its clearing firm, JP Morgan to give Goldman the $2 billion from its chief list synchronous with the campaign of the trades.
JP Morgan would no loosen the funds. They barked, stating that they felt they would still be at risk if this were to happen. A clearing firm hates risk, and not wants to take risk. Amaranth quite quickly had to operate in the maximum treacherous waters imaginable. They had to begin talking to outsiders in a desperate offer to structure a transaction with anyone competent of taking these trades or injecting new additional capital. Remember, this is Wall Street, the sharks were circling.
Anyone who had perception of Amaranth's trades knew immediately how ticklish the fuel markets that Amaranth was contained in. They also understood how apt play the market apt its own convenience using Amaranth's weaknesses. The SHARKS came in and did trades that would work to their vantage. Within a matter of trading hours, this monster hedge fund was losing hundreds of millions of appended dollars. Merrill Lynch decided to take a chip of the funding deal, and this drove Goldman Sachs up a walls. Goldman upped the ante, and decided to dictate Amaranth hundreds of millions extra to do the deal which would partially save Amaranth.
Now here's where our anecdote of the physician with the patients message and the patient's wager come in convenient. JP Morgan as the clearing broker was in a position to know more about the condition of Amaranth's books, and their trading positions than anyone another in the industry. Since JP Morgan also trades in the same market as Amaranth [link widoczny dla zalogowanych], the bank knew the market's condition better than anyone else also.
When the Morgan bank was informed that a deal was forthcoming among Goldman and Amaranth [link widoczny dla zalogowanych], the Chairman of

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