After a scathing first segment on how corporations like JP Morgan and J&J have been allowed to perpetrate alleged violations of civil and criminal law with no apparent likelihood of any actual humans being held to account or even any admission of criminal wrongdoing but nothing more than the payment of multibillion dollar settlements, The Daily Show did this piece relating to a credit default swap.
The gist of it is that Blackstone, a private equity firm, purchased a CDS on debt of Euro gambling company Codere. It then loaned the company $100M on the condition that it pay back the loan which was insured by the CDS late, thereby triggering it. IOW, when the underlying loan of a CDS is late, the insurance provision is triggered and the owner of the CDS, in this case Blackstone, is entitled to payment. So when Codere missed its payment, intentionally, as per its agreement with Blackstone, Blackstone “earned” over $15M plus they were still entitled to payment on their $100M loan.
And by the way, this is perfectly legal.
If you get a chance, you should really try to watch the full Dec 4th Daily Show broadcast. Very enlightening.
Those who don’t learn from history (and some of the lessons of 2008 should have been very clear, for example) are destined to repeat it; first as tragedy, then as mundane and pointless.
It’s not that simple, and it’s really not an outrage, though whoever wrote that CDS is probably kicking himself.
What you’re overlooking is that Blackstone is still retaining risk in this whole deal. They may not get that $100M back. That missed payment that triggered the CDS was a missed INTEREST payment, not a repayment of the whole loan.
You can’t manipulate credit default swaps like that because payouts are made based on the difference between the par value of the bond and that bond’s post-default value. If the company is still solvent and likely to pay the bills, a late-payment credit event won’t have a big effect on bond prices, making that CDS payout pretty small, if anything.
Huh? The very first sentence of this article contains a link to the original story at Bloomberg. In fact, this entire article you linked is just a shoddy rewrite of the much more detailed Bloomberg article.
Bloomberg is most definitely a “financial news network”.
IANAL, so I won’t debate whether or not laws were broken.
But if you read the article, believed it, and are not outraged, then I feel comfortable placing you among the Dog-Eat-Dog camp, who believe that recent financial crises were the desirable results of Boys Just Having Fun, that government should de-regulate banking even further, and that the whimpering underclasses should just get out of the way.
If you’d watched both segments, the point was that none of the on air networks covered it. I assume that included Bloomberg TV. But if they did actually cover it and they weren’t counted, that wouldn’t have been surprising since they’ve never actually made money and have ratings so low they can’t even be measured - seriously.
Personally I love Bloomberg and think they’re the only REAL financial channel on tv, but that’s just me.
Good, then you can explain that to me since I’m not an expert in derivatives writing or trading. Explain to me how the folks who wrote the CDS Blackstone bought weren’t essentially defrauded in the deal. Because that seems to be the crux of the issue to me.
Because since it’s probably another major financial firm who wrote it, they should have known better. It’s like the guy says in the original BB article: "The only losers are the guys who seemed to play the CDS market incorrectly or didn’t see this as a potential outcome.”
It’s like if an insurer wrote a life insurance policy but didn’t write a suicide clause into it and someone killed himself so his family could get a payout. Would that be fraud? I don’t think so. It wasn’t in the policy. It’s not particularly laudable, but not fraudulent either.
It’s not anything like that. It’s like not including a clause in a home owner’s policy that you can’t torch your own house for the insurance money. And why can’t you do that? Because it’s illegal.
Granted the people who wrote the CDS might have been able to include a clause that would have prevented that, but how would that have gone. Think about that for a moment. When you write a CDS that can be traded on the open market, you have no idea who will buy it. So exactly what language do you put in and more importantly, how can you even be sure that language will be enforceable?
This is one of the huge problems with the derivatives market. As far as I can tell, it is still largely unregulated and open to this sort of manipulation. And there is little room to argue that this action was not manipulative and certainly fraudulent in spirit if not in legal fact. But THAT is precisely the problem and why people SHOULD be upset.
Now as a practical matter, I don’t see this as becoming common practice because any company that does this will see rates on their CDS’s increase I would imagine/hope, so I assume there will be a market-based disincentive for it. But as I see it, that’s hardly the point.
Of course they wouldn’t and they don’t, because they do a cost benefit analysis and the benefits of being able to insure against potential losses with CDS’s and similar instruments far outweighs the risks.
This is the problem with the average person looking in on the financial markets. They don’t look at these things pragmatically. I understand that this was a very clever move by Blackstone. It’s one of the reasons that they’re one of the largest and most successful venture capital firms out there. But that doesn’t blind me to the flaws in the system and the urgent need for regulation.
