The subtext of JPMorgan's landmark deal to buy crude and sell gasoline for the largest oil refinery on the U.S. East Coast was barely disguised.
In joining private equity firm Carlyle Group to help rescue Sunoco Inc's
Philadelphia plant from likely closure, the Wall Street titan cast its multibillion-dollar physical commodity business as an essential client service, financing inventory and trading on behalf of the new owners.
Reuters summed up the issues with:
JPMorgan deal with Carlyle, Sunoco throws light on Volcker (Rule)
* Proposed rule curbs deals with producers, consumers
* Commodity forwards are swaps by another name - Regulators
* Commodity forwards are not derivatives - Banks
The media missed Carlyle's prior loss of SemGroup, a staid pipeline company, to forward looking contracts. Over $3 billion in bad bets sent SemGroup into bankruptcy. Former FBI Chief Louis Freeh conducted the investigation. Freeh is currently investigating MF Global, purveyors of another deathly trading strategy. Here's Freeh on SemGroup:
Blackstone had determined that SemGroup had been utilizing a speculative trading strategy, which was referred to as “strangle trades.”
Carlyle knows the risk of forward contracts, however it wants to put as little cash into this deal as possible. While Carlyle levers PES with debt, JP Morgan can bet on inputs and final product.
JPMorgan will not only provide working capital for the joint venture between Carlyle Group and Sunoco Inc, but will also operate a 'supply and offtake' agreement that has the bank's traders shipping crude oil from around the world to the plant, then marketing the gasoline and diesel it makes.
It's a high-pressure double cracker. Should it blow, it'll be huge.
After SemGroup blew, Carlyle pled puffery as its defense in shareholders suits. Behavior under stress reveals character.