By Pam Martens and Russ Martens: March 15, 2022 ~
Traders who feel they were robbed of their profits trading nickel last week at the London Metal Exchange (LME) have taken to Twitter to verbally accuse the LME of favoring their “cronies” and behaving like “slime balls.”
Lining up as crony suspect Number 1 are units of JPMorgan Chase who, together, hold the largest number of Class B shares in the London Metal Exchange than any other member. Those units are J.P. Morgan Markets Limited with 25,000 shares; J.P. Morgan Metals Limited with 19,100 shares; and J.P. Morgan Securities with 25,000 shares for a total of 69,100 Class B shares, according to a listing of shareholders on the LME’s website.
In addition, the CEO of the Hong Kong Stock Exchanges and Clearing (HKEX), which bought the LME in 2012, is Nicolas Aguzin. He joined the HKEX last May after spending 31 years at JPMorgan. Aguzin also serves as a Board Member of the LME, where his bio notes that “from 2013 to 2020, Mr. Aguzin was CEO, J.P. Morgan, Asia Pacific where he was responsible for all the firm’s business across 17 markets.”
The reason that both the LME and JPMorgan are taking the heat from traders who say they were “robbed” of their profits, is that one of JPMorgan’s clients – the Chinese nickel and steel producer Tsingshan Holding Group – had secretly built up a massive short position in nickel, using both contracts at the LME and also over-the-counter derivative contracts with JPMorgan and other banks. When the price of nickel began to spike dramatically higher last Tuesday, the banks scurried to try to close out their short positions in nickel by buying back the contracts. That heavy buying pushed the price of nickel to a record $100,000 a metric ton and the banks could no longer afford to keep buying to close their short positions.
Bloomberg News has named JPMorgan as the largest counterparty to the Tsingshan trades while the Wall Street Journal has indicated that Standard Chartered and BNP Paribas are also involved.
It is believed that at some point last Tuesday the banks came clean with the LME as to what their total derivative exposure was and to the massive losses they would experience if the trading that occurred last Tuesday was allowed to stand. What is not in dispute is that the LME suspended trading in nickel last Tuesday and cancelled all of the thousands of trades that had occurred last Tuesday prior to the suspension of trading. The cancelled trades benefited the short positions but left other traders with profitable long positions out in the cold. (You can read all of the LME’s pronouncements about cancelled nickel trades and the like at this official link.)
In addition, to give JPMorgan and the other banks involved time to figure out a solution to their self-made mess, the LME has suspended trading in nickel since last Tuesday. Yesterday, the LME posted a notice stating that “trading in LME Nickel Contracts will resume at 08:00 [a.m.] London time on Wednesday 16 March 2022.”
As our readers might recall, it was secret derivative contracts in concentrated positions of certain stocks held by the big banks on behalf of the Archegos hedge fund last March that cost major global banks over $10 billion in losses. And yet, here we are again talking about secret derivative contracts and potentially heavy losses for banks.
Tsingshan’s controlling shareholder is Xiang Guangda, who is believed to have been behind the idea of going short billions of dollars in nickel. Yesterday, Bloomberg News reported that Guangda had “reached a deal with his banks for a standstill agreement to avoid further margin calls. During the standstill period, Xiang Guangda’s Tsingshan Group Holding Co. and its banks will continue discussions about a secured credit facility to cover the company’s nickel margin and settlement requirements….”
As we pointed out in our past reporting on Archegos, margin loans are supposed to be federally-regulated so that systemically-important banks like JPMorgan Chase don’t blow themselves up and leave the taxpayer on the hook for a bailout. We emailed the Financial Conduct Authority (FCA) in the U.K., which oversees the LME, as well as the U.S. Commodity Futures Trading Commission (CFTC) that oversees commodity trading at JPMorgan, to see if they were involved in providing oversight to this dangerous mess. The FCA responded promptly, and in a typical fashion, the CFTC remained silent.
The FCA said this:
“As a regulated investment exchange, the London Metal Exchange (LME) is responsible for the maintenance of fair and orderly markets. Together with the Bank of England, we have been engaging with LME’s exchange and clearing house, as well as other market participants, on an orderly resumption of the market in nickel.”
The FCA statement might give us some comfort were it not for the fact that the biggest bank involved in this mess – JPMorgan Chase – has admitted to five criminal felony counts brought by the U.S. Department of Justice since 2014. The man at the helm of the bank as its Chairman and CEO throughout that crime spree, Jamie Dimon, was not only allowed to keep his job but was handed a $50 million bonus by the bank’s Board of Directors.
Three of the felony counts involved the rigging of markets: one felony count the bank admitted to in 2015 was for its role in rigging foreign exchange trading. On September 29, 2020, the Justice Department charged JPMorgan Chase with two more felony counts involving rigged trading, to which it admitted, and fined the bank $920 million of shareholders’ money. One count was for rigging the precious metals market and the other was for rigging trading in U.S. Treasury securities.
And this is not the first time that megabanks on Wall Street have come under scrutiny for crony conduct at the London Metal Exchange and playing an improper role in physical commodity markets. The U.S. Senate’s Permanent Subcommittee on Investigations conducted a two-year investigation and released a stunning 396-page bipartisan report in 2014.
Findings from the report include the following regarding JPMorgan:
“The Subcommittee report details how JPMorgan amassed physical commodity holdings equal to nearly 12 percent of its Tier 1 capital, while telling regulators its holdings were far smaller; and that at one point it owned an amount equal to more than half the aluminum used in North America in a year.”
That JPMorgan is at the center of yet another trading scandal is an indictment of Congress and federal regulators to meaningfully reform Wall Street.