5 ms·

Not going to comment on the legality of this but this isn't the first time BX has done this and nothing happened previously. See [0]. I actually don't necessa

by whatok 9y ago

Not going to comment on the legality of this but this isn't the first time BX has done this and nothing happened previously. See [0]. I actually don't necessarily have a problem with this as the underlying company theoretically should see a real benefit from this. [0] https://www.bloomberg.com/view/articles/2013-12-05/blackstone-made-money-on-credit-default-swaps-with-this-one-weird-trick https://www.bloomberg.com/view/articles/2013-12-05/blackston...

totalZero 9y ago
In the Hovnian case, there have been some indications that there will be legal action if the triggering goes through. https://www.bloomberg.com/news/articles/2017-11-15/a-high-stakes-hedge-fund-battle-erupts-over-hovnanian-debt-deal https://www.bloomberg.com/news/articles/2017-11-15/a-high-st... https://www.wsj.com/articles/home-builder-accused-of-default-swap-scheme-with-blackstone-unit-1512168887 https://www.wsj.com/articles/home-builder-accused-of-default... Even if an individual trader buys stock in a company to manipulate a derivative and your price impact is beneficial for the shareholders, twenty executives, and a hundred pension funds, FINRA will not give you a free pass when they investigate him. No idea how complicated it gets at the institutional level, but I can't imagine there is a very strong argument for allowing manipulation to occur in this instance. Even if the company gets a cash injection, all of the counterparties who sold protection via CDS will get housed. I don't know who those counterparties are, but it's easy to imagine that they are trading with money from many sources, including university endowments, pension funds, insurance companies, and so forth. So where do you draw the line between beneficial manipulation and detrimental manipulation?
- whatok 9y ago
  I've read the Solus letter and like I said earlier, no comment on legality as that's not my domain. Just wanted to point out previous BX case.
- valuearb 9y ago
  So now CDS sellers are too big to fail? I imagine Hovnanian and Blackstone are owned by pension funds, etc, too.
  - totalZero 9y ago
    > So now CDS sellers are too big to fail? Not sure how you came to this conclusion. The point is that you can't argue "this is good for the company/shareholders/lender" if you're selectively choosing the winners without mentioning the losers. It's not compelling, especially not to regulators. The issue is that if you allow manipulation of derivatives, then the markets become totally useless and they reward only the large players who have the resources to make large trades and deals that custom-fit the triggers to their own payoff profiles. Many of the counterparties in the derivatives market trade against the banks where they do business, in effect meaning that banks would be manipulating their own customers if you allow certain manipulative tactics. And like it or not, it's an established fact that manipulation in the derivs market is, broadly speaking, illegal.
    - valuearb 9y ago
      Derivatives are legalized gambling. And this wasn’t manipulation, just two parties doing their fiduciary duties.
      - totalZero 9y ago
        > Derivatives are legalized gambling. I don't agree with you. There is a different utility to commodity futures, for example, than to bets on horse races or blackjack games. Derivatives allow tailored hedging of real-world risks. The regulatory stipulations are different, especially for dealers, and there is a far larger opportunity for people with predictive skills in the derivatives market. > And this wasn’t manipulation, just two parties doing their fiduciary duties. By this logic, any profit from market manipulation would be justified because it generates a return for investors. Yet the reason these behaviors are prohibited is because they make the market worse for everyone, arguably including the long-run returns of those very same investors. "Is it beneficial to my investors" is a very poor test to answer the question, "is it manipulation?".
  - TheCoelacanth 9y ago
    It's not really an issue of who fails or not. It's an issue of how much dishonesty and trickery you allow in the market.

by whatok 9y ago

totalZero 9y ago

In the Hovnian case, there have been some indications that there will be legal action if the triggering goes through. https://www.bloomberg.com/news/articles/2017-11-15/a-high-stakes-hedge-fund-battle-erupts-over-hovnanian-debt-deal https://www.bloomberg.com/news/articles/2017-11-15/a-high-st... https://www.wsj.com/articles/home-builder-accused-of-default-swap-scheme-with-blackstone-unit-1512168887 https://www.wsj.com/articles/home-builder-accused-of-default... Even if an individual trader buys stock in a company to manipulate a derivative and your price impact is beneficial for the shareholders, twenty executives, and a hundred pension funds, FINRA will not give you a free pass when they investigate him. No idea how complicated it gets at the institutional level, but I can't imagine there is a very strong argument for allowing manipulation to occur in this instance. Even if the company gets a cash injection, all of the counterparties who sold protection via CDS will get housed. I don't know who those counterparties are, but it's easy to imagine that they are trading with money from many sources, including university endowments, pension funds, insurance companies, and so forth. So where do you draw the line between beneficial manipulation and detrimental manipulation?

whatok 9y ago
I've read the Solus letter and like I said earlier, no comment on legality as that's not my domain. Just wanted to point out previous BX case.
valuearb 9y ago
So now CDS sellers are too big to fail? I imagine Hovnanian and Blackstone are owned by pension funds, etc, too.
- totalZero 9y ago
  > So now CDS sellers are too big to fail? Not sure how you came to this conclusion. The point is that you can't argue "this is good for the company/shareholders/lender" if you're selectively choosing the winners without mentioning the losers. It's not compelling, especially not to regulators. The issue is that if you allow manipulation of derivatives, then the markets become totally useless and they reward only the large players who have the resources to make large trades and deals that custom-fit the triggers to their own payoff profiles. Many of the counterparties in the derivatives market trade against the banks where they do business, in effect meaning that banks would be manipulating their own customers if you allow certain manipulative tactics. And like it or not, it's an established fact that manipulation in the derivs market is, broadly speaking, illegal.
  - valuearb 9y ago
    Derivatives are legalized gambling. And this wasn’t manipulation, just two parties doing their fiduciary duties.
    - totalZero 9y ago
      > Derivatives are legalized gambling. I don't agree with you. There is a different utility to commodity futures, for example, than to bets on horse races or blackjack games. Derivatives allow tailored hedging of real-world risks. The regulatory stipulations are different, especially for dealers, and there is a far larger opportunity for people with predictive skills in the derivatives market. > And this wasn’t manipulation, just two parties doing their fiduciary duties. By this logic, any profit from market manipulation would be justified because it generates a return for investors. Yet the reason these behaviors are prohibited is because they make the market worse for everyone, arguably including the long-run returns of those very same investors. "Is it beneficial to my investors" is a very poor test to answer the question, "is it manipulation?".
- TheCoelacanth 9y ago
  It's not really an issue of who fails or not. It's an issue of how much dishonesty and trickery you allow in the market.