I think someone mentioned that JP Morgan has worked with Barrick on their derivative progam.
"J.P. Morgan Chase
It's been a tumultuous time for J.P. Morgan Chase (JPM: Research, Estimates), due to report ahead of the bell Wednesday. Heavily exposed to Kmart, Global Crossing, Argentina and, especially, Enron, the bank has taken mighty losses over the past year. Nor is the trouble over just yet -- there may not be any more Enrons out there, but the bank's exposure to other troubled energy firms is a cause for concern.
The book on Enron, at least, appears to have closed. Earlier this month the bank said it would take a $400 million charge related to the settlement of an Enron-related surety bond dispute with insurers. It said it would take an additional charge of $900 million to pay for other lawsuits over the bank's dealings with Enron and to settle charges of conflicts of interest on Wall Street.
Why it matters: Some companies are good barometers of the health of a specific sector or the economy at large; J.P. Morgan is an indicator of the stupidity bankers will stoop to during an investing bubble. The sooner J.P. Morgan sorts through the aftereffects of its past mistakes, the sooner the post-bubble hangover will go away for all of us.
Analysts expect J.P. Morgan lost 7 cents a share in the fourth quarter, compared with a year-ago gain of 12 cents
"
money.cnn.com
JP Morgan could likely be a leading indicator for the breakout of gold. As it goes south gold accelerates to the upside.
From the 2001 annual report pages 65-66:
(note for some strange reason "'j's' and g's" were dropped. I fixed the ones I caught.)
" (i) Implementation adjustments
As at January 1, 2001, the Company recorded the fair
value of derivative instrument assets of $15 million in
other assets, and derivative instrument liabilities of
$57 million in accounts payable and accrued liabilities.
Included in derivative instrument liabilities are written
old call options and total return swaps with a fair value
of $45 million that were already recorded at fair value
prior to the implementation of SFAS 133. Included in
derivative assets are purchased old call options that
were recorded at their historic cost of $44 million prior
to the implementation of SFAS 133. The adjustments to
the carrying amounts of derivative assets and liabilities
were recorded as at January 1, 2001 in accordance with
the transition provisions of SFAS 133 as follows: a
cumulative-effect loss of $1 million (net of tax of
$1 million) was reflected in current period earnings,
representin the fair value of previously unrecognized
derivative instruments that had not historically been
given hedge accounting treatment; and a cumulative-effect
loss of $35 million (net of tax of $4 million) was
recorded in other comprehensive income, representing
the adjustment to fair value of purchased old call
options, which, to ether with associated spot deferred
contracts, qualified for hedge accounting treatment
as synthetic purchased put options prior to the
implementation of SFAS 133. In addition, deferred
gains of $35 million relating to gold and silver hedging
contracts were reclassified on adoption of SFAS 133
from other long-term obligations to accumulated
other comprehensive income.
Accountin for derivative instruments
and hedging activities
In accordance with SFAS 133, all derivatives are
recognized on the balance sheet at their fair value.
On the date that the Company enters into a derivative
contract, it designates the derivative as either
(1) a hedge of (a) the fair value of a recognized asset
or liability or (b) an unrecognized firm commitment
(a “fair value” hedge); (2) a hedge of (a) a forecasted
transaction or (b) the variability of cash flows that are
to be received or paid in connection with a recognized
asset or liability (a “cash flow” hedge); (3) a foreign-currency
fair-value or cash flow hedge (a “foreign
currency” hedge); (4) a hedge of a net investment in
a foreign operation; or (5) an instrument that is held
for trading or non-hedging purposes (a “trading ” or
“non-hedging ” instrument). Changes in the fair value
of a derivative that is highly effective as, and that is
designated and qualifies as, a fair-value hedge, along
with changes in the fair value of the hedged asset
or liability that are attributable to the hedged risk
(including changes that reflect losses or gains on firm
commitments), are recorded in current-period earnings.
A derivative is highly effective when the fair values or
cash flows offset changes in the fair values or cash flows
of a designated hedged item. Changes in the fair value
of a derivative that is highly effective as, and that is
designated and qualifies as, a cash flow hedge, to the
extent that the hedge is effective, are recorded in other
comprehensive income, until earnings are affected by
the variability of cash flows of the hedged transaction.
Any hedge ineffectiveness (which represents the
amount by which the changes in the fair value of the
derivative exceed the variability in the cash flows of
the forecasted transaction) is recorded in current-period
earnings. Changes in the fair value of a derivative
that is highly effective as, and that is designated and
qualifies as, a foreign-currency hedge are recorded in
either current-period earnings or other comprehensive
income, depending on whether the hedging relationship
satisfies the criteria for a fair value or cash flow hedge.
Changes in the fair value of non-hedging derivative
instruments are reported in current-period earnings.
The Company has not elected to apply hedge
accounting under SFAS 133 for any of the derivative
instruments outstanding durin 2001.
(iii) Impact of derivatives on impairment assessments
Assets and liabilities designated as hedged items are
assessed for impairment or for the need to recognize an
increased obligation, respectively, according to generally
accepted accounting principles that apply to those
assets or liabilities. Such assessments are made
after hedge accounting has been applied to the
asset or liability and exclude a consideration of
(1) any anticipated effects of hedge accounting and
(2) the fair value of any related hedging instrument
that is recognized as a separate asset or liability. The
assessment for an impairment of an asset, however,
includes a consideration of the gains and/or losses
that have been deferred in other comprehensive
income as a result of a cash flow hed e of that asset.
I Revenue recognition
Revenue from the sale of gold and by-products is
recognized when the following conditions are met:
persuasive evidence of an arrangement exists; delivery
has occurred in accordance with the terms of the
arrangement; the price is fixed or determinable and
collectibility is reasonably assured. For gold bullion sold
under spot deferred contracts or in the spot market,
revenue is recognized on transfer of title to the old
to counterparties. For gold concentrate, revenue is
recognized on transfer of legal title to the concentrate
to third party smelters based on the estimated gold and
silver content of the concentrate at market spot prices.
Adjustments to accounts receivable between the date
of recognition and the settlement date, caused by
changes in the market prices for old and silver, are
adjusted through revenue at each balance sheet date.
Effective October 1, 2000, the Company
implemented Staff Accountin Bulletin (“SAB”) 101,
Revenue Recognition. In accordance with SAB 101,
revenue is recognized at the time of delivery of gold
bullion to counterparties and as described above. This
represented a change from the previous accounting
policy whereby revenue was recognized at the time
gold was in doré form, in accordance with long-standing
industry practice. The impact of this change in 2000
was an increase in net loss of $25 million, as well as an
increase in basic net loss per share of $0.04 includin a
cumulative amount of $23 million.
Revenue from the sale of by-products such as silver
and copper is credited against operatin costs. Revenue
from the sale of by-products was $110 million in 2001
(2000 – $115 million, 1999 – $113 million)."
Barrick talks about counterparties in the 3rd quarter report. My question is who are the people on the otherside of these trades that are willing to take on the downside risk. It is also to note the usage of "transfer of title" in their reports.
They note
"A Derivative instruments
We utilize over-the-counter (“OTC”) contracts as the primary basis for entering into derivative transactions. These privately negotiated agreements, compared to exchange traded contracts, allow us to incorporate favourable credit, tenor and flexible terms into the contracts. The underlyings in the contracts include commodities, interest rates, foreign currency exchange rates and bond indices with diversified credit exposure. We do not enter into derivative instruments which we would consider to be leveraged."
It would be interesting to know who designed Barricks derivative program and/or advises them on it. The program that they have implemented seems to be one in which they never will and never can suffer a loss. Unfortunately, that sounds very familiar in these troubled times.
Just the musings of a jittery investor. |
