Tuesday, January 30, 2007

Amaranth's death throws

The following description of Amaranth's dire situation will be no surprise to readers of the Recapitulator:

The final agonies of Amaranth, described by dozens of people close to
the roller-coaster negotiations about its fate, began on Friday, Sept.
15. Bleeding cash and facing a Monday demand for money it didn't have,
Amaranth scrambled through an intense weekend to find someone who
would take over losing energy investments for a price.

See a timeline of key events in the history of hedge funds.It did
negotiate a rescue plan, requiring it to pay nearly $2 billion to
Goldman Sachs Group to take toxic trades off its hands. Strapped for
cash, Amaranth aimed to get the money to do the deal by using cash
collateral on deposit with its middleman for natural-gas trades, J.P.
Morgan Chase & Co.

But on Monday morning, just after Amaranth had told its investors a
rescue was close, J.P. Morgan said it wouldn't release the collateral.
The firm was effectively responsible for making sure parties to
Amaranth's trades got paid, and it said the rescue plan didn't free it
of this risk, according to people familiar with its stance. J.P.
Morgan's refusal killed the plan. Amaranth's situation went from dire
to desperate.

Two days later, J.P. Morgan itself agreed to take over most Amaranth
energy positions. With a partner, it cut a deal that turned out to be
lucrative for J.P. Morgan -- earning it an estimated $725 million --
but more painful for its longtime client, Amaranth.

Ruthlessly squeezing a client, and taking the positions over at the most opportune time. The Recapitulator respects the negotiation and business skill involved here, but also marvels at how far away the clients of Amaranth were from this whole process. Where did those wonderful profits come from??

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