Jon Stewart just did a very funny piece on "The Daily Show" about a new derivatives dust-up that Bloomberg News broke.
Earlier this year, a big Wall Street firm bought a credit default swap on debt that a private company owed to a third party. So the firm was set up to make money if that company missed any payments.
Then the firm offered the company a multi-million-dollar loan… with the condition that they would miss a payment on the other loan. They did. And the Wall Street firm walked away with a $15 million insurance payment.
Sound less than kosher? Oh, don't worry. It's perfectly legal.
"The Daily Show" team pointed out that this behavior isn't illegal but maybe should be, and that the media didn't cover it at all and maybe should have.
But there's something they missed, and it's even more frightening.
Here are the details…
There's More to the Blackstone-Codere Deal
Last year Spanish gaming company Codere SA was in deep doodoo. They still are. They had a bunch of outstanding bonds (more than 1 billion euros worth) that they were likely going to default on.
So, in comes GSO Capital Partners LP, a credit investing unit of the world's biggest private equity firm, Blackstone Group LP (NYSE: BX). GSO buys up a package of Codere's outstanding debt and CDS (credit default swaps) on the same debt.
Credit default swaps are derivatives. They are a type of insurance. Say you invested in Codere's bonds and you're afraid they might default and you won't get paid your interest or principal. You can buy CDS from, most likely, hedge funds or banks, and pay them premium monthly payments, just like you would on any insurance policy. If Codere defaults, you get paid and are made whole.
Well, GSO bought Codere's debt and CDS insurance on that debt. Makes sense, right?
GSO also bought out a syndicated revolving line of credit for up to 100 million euros that several banks had set up for Codere. GSO then went to Codere and said, "Hey we now control whether you're going to get any money out of this loan facility. And we'll loan you what you need to make payments on your outstanding debt, so you don't default."
But that wasn't the whole deal.
They also said to Codere, "We want you to make your next payment two days after it's due, so you technically default. Then we'll loan you the money to make your interest payment."
And that's what happened. Codere had a deal to get the money it needed to pay the interest due on its debt. But GSO wanted it to technically default by not making the next payment on time. That's because GSO wanted to collect on the insurance it bought on Codere defaulting.
Nice game, huh?
Again, Jon Stewart and his crew at Comedy Central covered this story last week. (Google "Daily Show Blackstone Codere" to watch it.)
But the situation is a little more complicated than Stewart makes it out to be.
Here's the rest of it.
Yes, GSO made Codere default so it could get paid on its default insurance (if you're a hedge fund or bank that sold them the insurance, trust me, you're pissed off). There were plenty of other investors who owned debt that were going to get paid on their CDS insurance too.
The game wasn't just to collect the insurance…
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Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains.Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.
TAKE A PAGE FROM A ROTHSCHILD
Shah,
All this sure sounds like something a Rothschild Banker would do for some "chump change". Financing wars and loaning more money to indebted and decrepit Western Governments remains their traditional "bread and butter", of course.
Speaking of wars, the tempo is going to progressively increase each year, beginning in 2014. As it turns out, wars occur in cycles and the next upcycle is due to begin soon ( 2014-2021). Wars are profitable (primarily for US BANKERS), especially when you loan money to BOTH sides and then bet on one against the other-all at the same time. Again, The Rothschild Banking Family is world famous for this approach to international banking (Reference: The Battle of Waterloo, Napoleon Bonaparte vs. Duke of Wellington).
OBAMA'S NEXT DILEMMA
The next War (conflict) is probably going to erupt between China and Vietnam ( maybe include the Philippines, as well) in the South China Sea over the Spratley Islands. (This 160,000 mile ocean and small island complex is particularly rich in oil and gas resources). These islands are located close to China and are largely uninhabited. So, there is every reason for China to claim all of them and if it leads to some shooting, would be an inconsequential cost for them.
However, looking impotent again would definitely hurt world confidence in the United States. We suffered a lot of international credibility already when Obama backed-off intervention re: Syria's chemical weapons and Iranian and Russian support, especially right after a stinging defeat with the destruction of the U.S. Embassy in Benghazi, Libya and murder of a U.S. Ambassador (Stevens). I predict we would get involved against China in the Spratley Islands on behalf of the Philippines and possibly Japan. We have more to lose than China and little to gain, except looking indecisive or getting our butts whipped. Either way, its Obama's Next Dilemma.
I wouldn't say it's legal. They conspired to defraud the insurance company.