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Turning Amaranth Lead Into Gold For JPMorgan and Citadel

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Today’s edition of Platt’s Energy Trader takes in depth look at how Citadel and JPMorgan took over Amaranth’s energy portfolio, turning Amaranth’s losses into profit. The basic outline of the story is that after gas prices sank and the spread between March 2007 and April 2007 natural gas futures shrank, Amaranth found itself in the troubling position of having to sell off assets, in part to meet the margin calls of its broker, which happened to be JP Morgan. Citadel and JP Morgan then teamed up and bought the portfolio at a steep discount—a move that some at the time thought looked like a bailout of Amaranth.
As it turned out, Amaranth collapsed anyway. It’s energy trading desk was at the heart of its operations, and after the meltdown it had little hope of going on. And the “bailout” was anything but an act of charity or an LTCM-style attempt to shore up market stability. JPMorgan and Citadel had their eyes keenly on the prize—profits. In a matter of weeks, JPMorgan turned around and sold it’s half of the Amaranth position to Citadel, pocketing a cool $750 million.
It must be nice to be a JPMorgan prime brokerage client. First they squeeze you on the margin call, then scoop up your assets and make $750 million by selling them. Wonder how Amaranth founder Nick Maounis feels about JPMorgan these days.
Here’s how Platt’s describes Citadel’s side of the bargain.

Citadel acknowledged that there is still substantial risk connected to the remaining Amaranth trades, and it set aside cash reserves to cover those risks. “These reserves reflect the illiquidity of the portfolio and the operational risks involved in the initial assumption of the portfolio,” Citadel said.
Citadel said it expects to have eliminated those risks, and the need to reserve funds, by the end of the year.

Which is to say, Citadel expects to have fully turned-around the trades that brought down a large and long-standing hedge fund in a matter of three-months. Like we said earlier, damn it’s good to be Ken Griffin.