Market Manipulation Officially Doesn’t Exist Anymore

Richard B. Levine/Levine Roberts/Newscom via ZUMA

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.

Remember credit default swaps? Roughly speaking, they were designed as a way of turning a low-rated bond into a higher-rated bond. You’d buy, say, a BBB bond, plus insurance from a third-party against the possibility of default, and for all practical purposes you’re paying a higher price but getting the security of a AAA bond.

These kind of swaps aren’t inherently bad, but they can turn bad if they’re misused or mispriced or misrated or become so widespread that you need to start worrying about the stability and honesty of the firm selling the CDS. With that in mind, check this out:

The Commodity Futures Trading Commission took an interest last year when Blackstone’s GSO Capital Partners LP disclosed it had taken out insurance on bonds issued by Hovnanian Enterprises Inc. wagering the home builder would default on its debts. Blackstone offered Hovnanian a low-cost loan and persuaded the builder to miss a small interest payment in exchange, which would trigger payouts on $333 million in Blackstone’s credit-insurance contracts and yield the firm tens of millions of dollars, depending on market factors.

The insurance contracts Blackstone took out, known as credit-default swaps, typically pay out when a company defaults, usually reflecting dire financial straits. But Hovnanian was healthy enough to pay its debts, so a default would be opportunistic.

Blackstone’s plan quickly became controversial….

Controversial? Give me a break. Blackstone provided a loan on condition that the buyer deliberately fake a default so that Blackstone could collect on its CDS. There are really only two options here:

  • This is baldly illegal and some people should end up in prison over it.
  • It’s not illegal and we should enact laws/regulations pronto to make it illegal

If you read the rest of the piece, you learn that Blackstone was sued by the company it bought the CDS from, which was none too pleased to learn that it was the target of a scam. But a judge ruled against them, suggesting that this kind of scam isn’t, in fact, illegal. This set off a countdown clock for the fake default to take place and for Blackstone to collect its reward. “That gave CFTC staff time to work with the parties to try to avoid a default—and a payout to Blackstone via the credit-default swaps—a possibility that worried the agency’s senior leadership.” In the end, that’s what happened:

The missed payment touched off a month of negotiations to unwind the credit-default-swap position. Blackstone first struck a deal with Goldman Sachs Group Inc., which was also caught on the other side of Blackstone’s trade, then settled with Solus shortly before the 30-day window ran out. The settlement, whose terms weren’t made public, compensated Blackstone for backing out of the default while prohibiting it from triggering the insurance Solus had written, people familiar with the matter said. Blackstone then released the Hovnanian interest payment, letting the credit-protection seller, Solus, off the hook and delivering the CFTC’s desired outcome.

So everybody made a little money, probably, and the CFTC got its fig-leaf public compromise. That’s all great, but if this doesn’t count as illegal market manipulation, I sort of wonder what does. Maybe nothing, anymore.

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate