Table 4. JPMorgan Chase was a party to $6.36 trillion in notional value of credit default swaps, both as a seller and a buyer of protection. Table 2. According to Depositary Trust & Clearing Corporation, four weeks ago there were a total of $15.15 trillion in notional value of credit default swaps outstanding. DTCC only counts one side, so to make these numbers comparable, you have to double DTCC\u2019s figure. You also have to assume that there has not been a great change in the total outstanding since 9\/30. With those assumptions, JPMorgan was a party to 21% of all CDSs. The top five banks together were a party to 40% of all CDSs.<\/p>\n
One of the major risks in derivatives is called counter-party risk, the risk that the other party to the contract will not perform. <\/span>The OCC report does not put a figure on this risk. It uses very rough measures, such as gross positive fair value, which is sometimes shown on financial statements as \u201cderivative receivables\u201d. That is the total of all derivative contracts with a positive value, that is, if the contract terminated, the counterparty would owe money to the bank. Then there is gross negative fair value, \u201cderivative payables\u201d, the total of amount the bank would owe if the contracts terminated. These are the only numbers JPMorgan Chase reported in its recent SEC filing<\/a>. Derivative receivables were $80.2 billion, down from $162.6 billion a year ago. Derivative payables total $60.1 billion, down from $121.6 billion a year ago.<\/p>\n The OCC doesn’t address bankruptcy of counterparties, as in the case of Lehman Brothers. JPMorgan has 75,000 derivative contracts with Lehman. Paragraph 3, page 2 of bankruptcy pleading viewable here<\/a>, enter \u201cLehman Brothers Holding in the box for Debtor and 4325 in box for Docket #.<\/p>\n Let\u2019s see what happened to a couple of derivative holders. Aliant Bank of Birmingham, AL, entered into two interest rate swaps with Lehman, and posted a Fannie Mae security with a face value of $5,250,000 as collateral for its (Aliant\u2019s) obligations. The security was held by JPMorgan as agent for Lehman. Lehman’s bankruptcy was an event of default under both swaps. Aliant demanded payment of the amount due it upon default, and demanded return of its collateral. Lehman refused to pay. JPMorgan refused to deliver the collateral, on the ground that it had set-off rights against Lehman. Aliant sued. Dkt. 1726. The matter eventually settled. Aliant got an unsecured claim of $2.8 million, the value of which is unclear, and transferred the claim to JPMorgan. Aliant must have gotten its collateral back, but it took a year.<\/p>\n Here\u2019s another. In 2002, Lehman created the Dante transactions under which AFLAC bought notes. Under a very complex set of documents, Lehman had first call on money from the venture, and AFLAC had second call. The documents provided that if Lehman filed bankruptcy, it lost its first priority for payment, and AFLAC got first call on the money. When Lehman filed, AFLAC filed suit in England for declaratory judgment that it is entitled to the money. AFLAC won, but the English Judge didn\u2019t deal with the effect of the American bankruptcy.<\/p>\n Then Lehman filed a suit in bankruptcy court for declaratory judgment that the shifting of priority for payment could not be enforced against it under bankruptcy law. Lehman asserts that under the Bankruptcy Code clauses in contracts that become effective only when a bankruptcy is filed are unenforceable. Apparently AFLAC filed a motion to dismiss in the bankruptcy case, which was denied,causing a lot of heartburn for investors<\/a> in similar deals.<\/p>\n
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