Belial Bank’s Derivatives Trading Desk

Posted on by Phil Querin

Following the Morgan Stanley Mess, B.L. Zebub, Belial Bank’s now skittish leader, begins to wonder if his own empire is “Too Big to Manage.”  In an effort to reestablish the appearance of control, and avoid having a “Dimon in the Rough” moment, he has hastily convened an emergency meeting.  In addition to the usual suspects, a new attendee has been invited, Chase N. Prophett, head of Belial Bank’s South American trading desk.

B.L.’s legal intern, Les Guile, is in attendance, and after nearly a year of participating in these meetings, has developed into B.L.’s Jiminy Cricket, continuously reminding all attendees that the banking and servicing industries could use a crash course in morality training. Title industry hand-wringer Liz Pendens has called in on speaker phone, as has Dee Faulting, the Lizzy Borden of the default servicing industry.  Damian Faust, Belial’s chief legal counsel, could not make the meeting, as he is currently contending with the scandal that erupted when he was recently spotted sporting vanity plates on his new Porsche Carrera with the letters “TBTF.”  Lastly, Belial’s chief henchman, the morally vacuous, Kenneth Y. Slick III (aka “KY”), is in attendance, having recently returned from England after linking up with Morgan Stanley’s now infamous trader, Bruno Michel Iksil, aka “the London Whale,” in an effort to better understand what not to do when playing with fire derivatives.  B.L.’s loyal secretary, Lucy Furr, has dutifully transcribed this conversation. As before, Julian Assange insists that I not reveal the source of this purloined post. – PCQ

B.L. Zebub:  “Well, everyone, it’s been an interesting few weeks.”   The last time we met, it was a disaster.  I got it into my head that Belial Bank needed a reputational makeover, so I impetuously hired that hack from Spit Shine Public Relations.  I foolishly thought that somehow, if we polished up our image, the American people would grow to like us.  After I fired her, I personally undertook my own PR campaign, which fell flat.  It cost us an extra half million dollars, and I ended up deciding it’s just no use. Fate has conspired against us, and we simply have to accept the fact that we have so alienated the Little People, that we should just stop trying to endear ourselves to them.  So let’s just get started with….”

Les Guile: “Excuse me for interrupting sir, but this is the first I’ve heard that you tried your hand at Big Bank public relations.  I think that’s great.  Before we move on to our agenda items, can you tell us what you did, and why you thought it was such a failure?”

B.L. Zebub:  “Well, OK, but I don’t want a word of this getting out.  If the press got hold of this story, they’d have a field day.  So, after Spit Shine suggested the bumper sticker saying “How’s My Foreclosing?” along with the toll-free number of the Office of the Comptroller of Currency, I thought, maybe there is something that might work. I agree with Dee’s statement last time that we might as well just publicly flog ourselves, as to invite people to comment to the OCC about our foreclosure tactics.  So in an effort to introduce a little good-natured humor into our PR effort, I ordered up 50,000 bumper stickers that said, ‘Kiss Your Banker.’  Unfortunately, I placed the order over my cell phone….” (pause)

Liz Pendens:  “Well? Don’t keep us in suspense, B.L.  What happened? Where are the bumper stickers?”

B.L. Zebub:  “I can’t believe it, I just can’t believe it!  I’m through with AT&T. I’m switching to Verizon! I’m such a sap. And I had just subscribed to AT&T last month, after they started advertising that they had “More Bars in More Places.” I thought they really meant it.  I like a good place to drink as much as the next guy, and when I’m travelling I get a lot of trail dust in my throat.  I’m always looking for a friendly neighborhood bar.  So, it was an easy decision for me.  Hell, how was I to know they were talking about those little bars showing cell reception on my phone?  What a scam!  I’m sure I wasn’t the only guy who was taken in.  And, what’s worse, their service sucks!  A couple of tin cans and a string have better reception than AT&T!”

K.Y. Slick:  “OK, B.L. We get it. Now can you cut to the chase?  What happened to the order of 50,000 bumper stickers saying “Kiss Your Banker”? I’m almost afraid to ask….”

B.L. Zebub:  “Well, the short version is that as I was placing the order, my cell reception broke up.  Of course, I didn’t realize it at the time.  So two weeks later, I received fifty boxes of bumper stickers shipped to our head office.  I was so thrilled with this little PR move, that I invited all of our chief execs to a grand opening, where I ceremoniously opened the first box of stickers.  Well, don’t cha know…. Those idiots at the printing company sent me 50,000 bumper stickers saying “Diss Your Banker.”  They misunderstood what I said, and rather than call me, they printed ‘em up!  I guess they thought I was calling for Matt Taibbi, or something.  Anyway, I was mortified.  The execs were all rolling around on the floor, laughing. Someone told me it was the funniest thing they’d ever seen since Geraldo Rivera opened up Al Capone’s empty vault on live television.”

K.Y. Slick:  “Brilliant! Just brilliant” I’m really starting to believe there is something to ‘The Peter Principle.’”

B.L. Zebub:  “Well, hold on to your hats, ‘cause it gets worse.  As a part of my effort to portray a kinder, gentler Big Bank, I personally called the state Adopt-A-Highway Program, and had us sponsor a major statewide thoroughfare.  It cost us a ton of money, but I thought it would be worth it.  Who could possibly be mad at us for wanting to keep the highways clean?”

Dee Faulting:  “B.L. I’m starting to get a sick feeling about all this.  Ideas from someone who thinks that AT&T really runs neighborhood bars, are bound to backfire.  So, B.L., what did the message say on the Adopt A Highway sign? Or should I ask?”

B.L. Zebub:  “I’ll just ignore the editorial comment, Liz.   The message simply identifies “Belial Bank,” and has a tag line saying “The Devil You Know.” I thought it was very clever, and reminded people that they should prefer us over the competition.  Apparently, however, some folks didn’t see it that way.  It seems thousands of people stopped using our adopted highway entirely. They started taking side roads and local streets.  Anything to avoid having to drive on a highway sponsored by a Big Bank.  And those that did use it went out of their way to litter it up, just to make it more expensive to clean up.  Some even abandoned old rusted cars and farm equipment on it.  I even saw the burned-out skeleton of an old ’49 Packard like the one my grandparents used to drive. It was like people were just waiting to make a statement, and I guess they did. There were traffic jams on all the local roads because so many drivers refused to use our highway. So, Belial Bank took another huge hit to goodwill.  Like I said at the start of the conference, it seems fate is conspiring against us.  We’re spinning hay, not gold. So I say “To hell with the Little People!  We don’t need ‘em. From now on, Belial Bank is going to focus on what it does best, making money and foreclosing the little guy.  So let’s focus on Victory! I love the smell of napalm in the morning!

K.Y. Slick:   “I couldn’t agree more, B.L.  So let’s get to the topic at hand, which I understood was the reason for this meeting: Derivative trading for our own account!  After the Morgan Stanley mess, I tried to get hold of Jamie Dimon, but he wouldn’t take my calls.  So I did the next best thing.  I flew to  London, and reached Bruno Michel Iksil.  He was JP Morgan’s trader that became known as “the London Whale,” because of the size of his derivative trades.  Problem was, his bets got so big that he couldn’t quickly unwind them when they started going south. The result was at least $2 billion in losses to JPM, and likely much more.  But the story behind the story is what interests me.  It seems that Bloomberg first picked up the story back in April, a month earlier. Essentially, the gist of it was that an unnamed London trader for JP Morgan was making huge bets in the Collateral Default Swaps market.  These bets were outsized, and eventually drew the attention of a Bloomberg reporter. On April 13, when JP Morgan’s CEO, Jamie Dimon, was first asked about it, he minimized it; called it a “tempest in a teapot.” However, given the size of the wagers and the press hoopla about “the London Whale,” it seems it was more of a tornado.  As it turns out, some hedge funds started betting against Mr. Iksil’s bets.  They smelled blood in the water.  According to a Wall Street Journal April 6 article about him, a trader at Merrill Lynch, “…wrote to investors that ‘…hedge funds are accelerating wagers against ‘the large long… ***’  ‘Fast money has [the] smell [of] blood….’  In short, if JP Morgan exited its large position, the bank would lose big and the hedge funds would win big.  But what’s most remarkable about the JP Morgan story is what the regulators were – actually weren’t – doing.  They weren’t regulating. Commodity Futures Trading Commission Chairman Gary Gensler didn’t know about the trades until he read about the London Whale in the news.  Neither did SEC Chairwoman, Mary Shapiro. So my take on all this is that it’s Great News!  We can go on making proprietary wagers with the house’s money, call it “legitimate and necessary bank hedging” and nothing will happen. Dodd Frank is a Paper Tiger.  It’s gonna be business as usual!”

B.L. Zebub:  “Nice report, K.Y.  Now let’s talk to our newest guest at this meeting, Chase N. Prophett.  Chase comes to us from Belial’s South American trading desk, in Lima, Peru.  Just like JP Morgan, we’ve found that plausible deniability is easier if some of our riskier trading activities occur in another country.  We still call it “hedging” mind you, but By Golly, Chase’s made us at least $100 million in pure profit over the last twelve months.  Although we don’t like to be heard using the expression: ‘He Walks on Water.’  So Chase, why don’t you tell us a little bit about yourself?”

Chase N.  Prophett: “Thank you, B.L.  It’s an honor to be here.  Well, my background is in the numbers game.  I graduated with honors from the Las Vegas School of High Stakes Gambling, with a major in mathematical probability and minor in coin flipping. I’ve been a lifelong member of PETB, People for the Ethical Treatment of Bankers, and subscribe to B.L.’s philosophy that: ‘It’s not cheating if you don’t get caught.’”

Les Guile: “Well, Mr. Prophett, it sure sounds like you were tailor-made for Belial Bank.  Morally vacuous, small minded, and with the credentials to prove it.  I understand that there is an upcoming Paper, Rock, Scissors competition at the local middle school down the street.  You may want to throw your hat in the ring.”

Chase N. Prophett:  “Excuse me?  B.L., where did this guy come from?”

B.L. Zebub: “Sorry, Chase, I should have warned you.  Since he’s been here, Les has morphed into a male version of Ann Coulter.  When he first arrived as a humble young intern, he was more considerate of our guests.  But over time, he seems to have developed a rather sharp tongue, especially for us banker types.  I really don’t know why I keep him around, except for the zingers.  They generally tend to draw blood, which is kinda fun to watch.  Les, where are you going with this?  Mr. Prophett is our guest!”

Les Guile:  “Well, sir, I’ve been doing a bit of research on Belial’s South American derivative trading.  I suspect you, like Jamie Dimon, took your eye off the ball, and haven’t really been paying much attention to Mr. Prophett’s activities. Mr. Prophett, why don’t you tell B.L. how you’ve been spending the bank’s money?”

Chase N. Prophett:  “Of course. I’ve got nothing to hide.  We are heavily invested in commodity derivatives.  As you all know, a derivative “derives” its value from another asset.  A derivative agreement is one in which an investor can either buy or sell the underlying asset at an agreed future date and at a pre-agreed price. Profits or losses come from the increase or decrease in the value of the underlying asset, which has already been fixed. The derivative, i.e. the underlying asset, is used as a tool for managing our bank’s risk, that is, for hedging. In our case, the underlying assets are commodities.  The derivatives are traded by investors who have no need for the commodity itself, since they never actually are in possession of them – they just keep trading them in the open market.”

Les Guile: “And what, pray tell, are those derivative commodities?  Precious metals, gold, silver, platinum?  What it is that – by my count – we have $20 billion of the bank’s dollars invested in – and what “risk” have we hedged against?”

B.L. Zebub: “Just a #@!&*%^! minute! $20 billion? Prophett, what are you doing, trying to become the London Whale?  If Les knows about this, you can be sure Bloomberg and the Wall Street Journal are already onto it.  They will know this isn’t just hedging as usual – it’s prop trading! This is going to be another nail in the coffin for the Big Banks.  It’s exactly what the Volker Rule is all about! Our goose is cooked!”

Les Guile: “If I may continue, B.L.  So Mr. Prophett, exactly what derivative commodities have you been  investing in?”

Chase N. Prophett: (Pause) “Ammonium oxalate, phosphates, nitrates. That sort of thing.”

Les Guile: “But Mr. Prophett, those are the bi-products of the commodity.  What is the commodity itself?  What is it that Belial Bank has quietly invested $20 billion of its own money in?”

Chase N. Prophett: “Alright, it’s Peruvian bird guano.  Our country’s coastline is famous for it. It’s really a wonderful fertilizer.”

Liz Pendens: “Bird poop!?” “Bird s__t!?”  [Transcript redacted.] B.L., tell me this isn’t true! This is all a horrible joke.  We’ve really sunk $20 billion into excrement!?”

B.L. Zebub: “Liz, I’m hearing this for the first time.  Now I know how Jamie Dimon felt like when he said he couldn’t breathe after realizing what had happened at his London trading desk!”

Les Guile: “Well, like Ron Popiel says about the Veg-o-Matic:  ‘But wait, there’s more!’ Tell us, Mr. Prophett, which one of your country’s feathered friends soars, strafes, and dive bombs all over its rocky coastline, so that Belial Bank can invest $20 billion of its own money in bird feces?”

Chase N. Prophett: “The __________ “ [inaudible].

B.L. Zebub: “Speak up, man!  We can’t hear you!”

Chase N. Prophett: “The Peruvian Booby.  It’s really a quite remarkable bird…“

Les Guile: “And that, folks, is the story the Wall Street Journal picked up today.  Mr. Prophett’s derivative trades were so outsized that he is now known by hedge fund traders around the world as Belial Bank’s ‘Peruvian Booby’.  The London Whale’s got nothing on you, Mr. Prophett!”

K.Y. Slick:  “Hmmm.  I think somebody upstairs doesn’t like you, B.L.  Who says God doesn’t have a sense of humor?  Too bad He’s captain of the Other Team.”

Posted in B. L. Zebub, Belial Bank, Financial Crisis, Foreclosure, Legislation - Federal, Market Conditions, Miscellany, Real Estate/Distressed | Tagged , , , , , ,
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