The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

Dear Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in, or responsible for, the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company, during which A.I.G. reassured us many times we would be rewarded in March 2009, we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable, in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity, directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it. But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees. That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.” That may also be why you authorized the balance of the payments on March 13. At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts, until several hours before your appearance last week before Congress. I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made, tacit or otherwise, with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust. As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you. The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats, even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree. That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less, in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients. This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses, especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer, there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”

Sincerely,

Jake DeSantis

By Matthew Leising and Elizabeth Hester

JPMorgan Chase & Co. managed to generate $5 billion in profit during the worst year in Wall Street history by trading over-the-counter fixed-income derivatives, two people with knowledge of the results said. The largest U.S. bank by market value, which reported $5.6 billion of total net income in 2008, hasn’t disclosed earnings for its interest-rate swap, municipal bond and foreign-exchange derivatives group. The unit was among the most profitable at the New York-based company, said the people, who declined to be identified because they weren’t authorized to divulge the figures. JPMorgan spokeswoman Kristin Lemkau declined to comment.

The JPMorgan trading desk, led by the 38-year-old Matt Zames, who previously worked at hedge fund Long-Term Capital Management LP, may have benefited as the collapse of Lehman Brothers Holdings Inc. and JPMorgan’s takeover of Bear Stearns Cos. left companies and hedge funds with fewer trading partners in the private derivatives markets. JPMorgan emerged “unscathed by the disasters” on Wall Street and positioned to capture more revenue as trading volumes grew, said Craig Pirrong, a finance professor at the University of Houston.

“It’s a flight to quality,” Pirrong said. “They expanded the scale of business, the number of trades people wanted to do with them, and it gave them pricing power.”

Derivatives are contracts whose value is derived from an underlying asset such as stocks, commodities or interest rates.

Over-the-counter refers to a type of private, unregulated derivative contract banks trade amongst themselves or with clients.

Link to Debt

The derivatives trades for JPMorgan are often linked to corporate debt underwritten by the bank. JPMorgan led its competitors last year with $132 billion in U.S. corporate bond underwriting, according to Bloomberg data. Corporations often enter into interest-rate swaps with banks to manage rate exposure on the debt they issue.

Among commercial lenders, JPMorgan dominates OTC derivatives trading, according to data compiled by the Office of the Comptroller of the Currency. The bank held $87.7 trillion worth of outstanding OTC contracts as of Sept. 30, more than the next two banks, Bank of America Corp. and Citigroup Inc., combined.

The OCC hasn’t yet released figures for Goldman Sachs Group Inc. and Morgan Stanley, the New York-based securities firms that converted into bank holding companies in September.

Client Fees Jump

JPMorgan told investors at a Feb. 26 conference in New York that client fees from interest rates and foreign exchange rose 60 percent last year from 2007. William Winters, co-head of JPMorgan’s investment bank, said the gap between bids to buy and offers to sell in OTC derivative markets doubled in the past 18 months. As that so-called spread widens, firms like JPMorgan that create the trades for clients can capture higher earnings.

“You take two times the bid offer, the volumes have stayed robust and an increase in market share, it’s a good business,”

Winters, 47, said at the conference.

Chief Executive Officer Jamie Dimon, 52, touted the firm’s trading results in the current quarter during a conference call with investors three days earlier.

“We’ve had strong quarter-to-date trading results, solid fee income in the investment banking side,” Dimon said on Feb.

23. “I should point out to you that this is my general conservatism. If it was up to the folks in the investment bank, they would have said extremely strong trading results.”

Source of Gains

The majority of JPMorgan’s OTC trading profit may have stemmed from interest-rate swaps in 2008, according to revenue figures reported by the OCC. During the first three quarters of last year, JPMorgan took in a total of $6.36 billion in OTC derivatives-trading revenue. Of that, $4.87 billion resulted from interest-rate positions, according to data from the OCC.

The remaining $1.49 billion came from foreign-exchange trading.

The OCC doesn’t report how much profit banks wring from OTC trading. The regulator hasn’t yet released fourth quarter results.

Since the events toward the end of last summer emerging market currencies have been taking an absolute beating.  Mexico, Brazil, Hungary, you name it…  The Mexican peso (picture to the right since the end of July, 2008) has lost a whopping 45% of its value against the US dollar since it’s lows on August 4, 2008.  That’s huge.  This is the currency of an entire country we’re talking about here…  The Mexican Central Bank has been trying to stem their currency’s devaluation for months now, but as you can also see from the above plot, they haven’t been having much luck.  Open advertising of attempts by central banks to manipulate their currency while maintaining certain fiscal and monetary policy targets is often an open invitation for leverage to take them on.  I don’t know if that’s what’s been happening here, but it’s definitely in the realm of possibility.

The Central Bank has evidently been snooping around again today prior to their daily auction, but today without even knowing they’re in the market they’re sending a very clear signal that they’re going to attempt to stem the peso’s depreciation any further, at least in the short term.  Take a look at the two day intraday plot of the peso below, looks to me like a Central Bank sitting there with a big, fat offer at 14.44, signaling the marketplace that the peso’s going to  stay below that level at all costs.  This begs the question, however: just how many greenbacks does the Mexican Central Bank have in their coffers to continue this kind of behavior?  Maybe it’s time for a trip to Cabo…

Thanks to Eric Holmberg for this fun little clip.

In the words of Art Enyedy…  Halliburton?  Bribery?  Corruption?  No Way!

The fact that Exxon just broke its own profit record in these dire financial times is a noteworthy achievement.  Given where oil was trading throughout 2008 one would expect the oil companies to have locked in a solid profit, considering that their fixed costs probably wouldn’t have really increased significantly from the previous year.  However, not only did Exxon break its own profit record, it broke the profit records of all companies.  Ever.   Throughout history.  $45.2B in profit!  That’s a lot of coin…  It’s also interesting that the UK’s Times hasn’t quite grasped how to spell “Mobil” correctly (see below).  (For the entire article click the image screenshot below.)

The person who sent me this site didn’t want their name associated with it, reading through some of the posts on it I found it pretty comical given the time’s we’re in.  If you have some time to kill, check it out for a laugh, clicking on the screenshot below will take you to the site…

Thanks Eric Holmberg.

There has been quite a bit of talk amongst my colleagues, in the news and on other blogs recently about oil companies and even investment banks storing crude in tankers moored at sea to profit from the oil price contango that’s been persisting in the market of late.  Most publicized of the latter, the investment banks, is Citigroup’s use of VLCCs to store massive amounts of crude off the coast of Scotland and the recent cancellation of orders to rent crude tankers by Morgan Stanley as the trade disappears. 

Below is a chart I pulled off Bloomberg this morning that shows the trade being profitable through certain periods in November and December, while today’s further widening spread demonstrates a ballooning of it back out to October levels.  (The red line is the difference between crude spot and December futures, while the blue like is the freight rate for storing crude.  As long as the red is higher than the blue, traders can buy oil to store and sell December futures, locking in an arbitrage profit.)

Similar to the post I put up in September about the crazy short squeeze that caught a lot of speculators trying to roll their oil futures at the last minute, this just goes to show there’s only a certain degree to which speculators can affect these commodities markets.  One marked difference here, however, is that these pundits actually wanted to (and did) take delivery of their oil.  But, it didn’t take long for news headlines and investment community chatter to see this arbitrage go the way of the buffalo…