Courts are facing a crash course in Derivatese and Enronian.
The New York S. District Court is hearing the first of megahours of testimony about complex commodities deals between JP Morgan Chase, an offshore vehicle called Mahonia, and the now bankrupt Enron.
In contention is about $1 Billion that JPM claims is owed by 11 insurers which guaranteed transactions. The insurers say they were tricked into insuring disguised loans from JPM to Enron via Mahonia.
Lawyers have struggled to explain derivatives even to judges, as this exchange, from a discovery hearing shows.
A lawyer is trying to explain to Thomas Griesa, a N.Y. district court judge, what a derivative is. He asked the judge to imagine himself as a furniture maker wanting to buy electricity:
Judge: I've agreed to buy for $10 and I've agreed to sell to somebody else for $5 times an index [the DOW, for example, is an index.], which is now 2, so I've agreed to sell something that today would be $10.
Counsel: You're absolutely right. Except the reason they're called derivatives is nobody is buying or selling anything. In fact, the [term] you'll often hear used with derivatives is notional amounts. This is -
Judge: I thought I was buying electricity for my furniture company.
Counsel: Right. That's why you want to enter into this.
Judge: But I have agreed to buy electricity for my furniture plant.
Counsel: That's correct. And you're worried that electricity prices will fall. So now you're going to enter into this … transaction that involves no buying of anything, to protect yourself should -
Judge: But am I buying or selling?
Counsel: You're not buying or selling anything. You're just agreeing to trade something in the future. You're agreeing to trade $10 for $5 times an index, or $10. On the day you enter into it, all you're agreeing to do is trade $10 in the future. And let me explain what happens.
Judge: I have no understanding of that.
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Second, One of the intelligent folks at gold-eagle forum (there are quite a few of them), made this observation about the court case:
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All the Judge or [lawyer] need to do is ask how many other (other than JPM or Enron)counter parties Mahonia did business with.
The answer will almost certainly be ‘none.’
Then ask them how many traders and staff were employed by Mahonia, (apart from some dodgy lawyers).
Again it will be none.
How JPM hopes to win this is beyond me.
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