Manipulating Codere December 7, 2013 at 12:33 pm

Matt Levine reports:

Blackstone Group LP bought credit-default swaps on troubled Spanish gaming company Codere SA, then agreed to roll a $100 million revolver for Codere on favorable terms in exchange for Codere agreeing to make an interest payment on some bonds two days late, thus creating a technical default and triggering the CDS, pocketing some gains for Blackstone at the expense of the CDS writers, without costing Codere anything

Now I am perfectly prepared to believe that this might not be market manipulation and that nothing actionable happened here. But if it wasn’t, why not? I mean, is this really ethically different from banging the close?

One Response to “Manipulating Codere”

  1. Well now potential CDS writers know that this asset class is less like dabbling in “financial derivatives” and more like getting into the insurance business. Even if the CDS markets were much more tightly regulated it may not have prevented something like this. Maybe the future of CDS isn’t greater standardization and more secondary market liquidity but greater customization and generally less secondary market liquidity. No insurance company would let you buy their fire insurance and then sell it to a known pyromaniac. The market may pause here for 30 seconds to bemoan the sordid ethics involved in this episode but then it will just restructure incentives for CDS buyers and sellers accordingly.

    And there is of course no close to bang in the less regulated/structured CDS markets. This is a manipulation of…fundamentals I guess, not trading/market mechanics. Perhaps a better analogy would be buying puts on a publicly traded company and then arranging to have that company delay a shipment of finished goods or something as part of a debt deal on the side.

    Fiendishly clever this but inevitable as will be the next evolutionary step for CDS.