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Hedge-fund hardball: How Amaranth was devoured by its banker, MorganChase

Amid Amaranth’s Crisis,
Other Players Profited

Goldman Offered Deal;
J.P. Morgan Balked,
Then Did One Itself

By Ann Davis, Gregory Zuckerman, and Henny Sender
The Wall Street Journal
Tuesday, January 30, 2007

When Amaranth LLC collapsed in the fall, after swiftly losing more than $6 billion, it was the biggest hedge-fund failure ever. Now as investors slowly get back what’s left of their money, it’s becoming clear the debacle also had some big winners: other players in the high-stakes energy market who profited from a crippled rival’s travails.

The final agonies of Amaranth, described by dozens of people close to the roller-coaster negotiations about its fate, began on Friday, Sept. 15. Bleeding cash and facing a Monday demand for money it didn’t have, Amaranth scrambled through an intense weekend to find someone who would take over losing energy investments for a price.

It did negotiate a rescue plan, requiring it to pay nearly $2 billion to Goldman Sachs Group to take toxic trades off its hands. Strapped for cash, Amaranth aimed to get the money to do the deal by using cash collateral on deposit with its middleman for natural-gas trades, J.P. Morgan Chase & Co.

But on Monday morning, just after Amaranth had told its investors a rescue was close, J.P. Morgan said it wouldn’t release the collateral. The firm was effectively responsible for making sure parties to Amaranth’s trades got paid, and it said the rescue plan didn’t free it of this risk, according to people familiar with its stance. J.P. Morgan’s refusal killed the plan. Amaranth’s situation went from dire to desperate.

Two days later J.P. Morgan itself agreed to take over most Amaranth energy positions. With a partner, it cut a deal that turned out to be lucrative for J.P. Morgan — earning it an estimated $725 million — but more painful for its longtime client, Amaranth.

Is there a pattern here? MF Global come to mind?

Anyone watch Margin Call yet?