As the global financial crisis lead to a decade ago, and learned most of the Americans the hard way, that questionable decisions on Wall Street can have severe consequences on the Main Street joined in high-gear.
We have all seen how bags of unethical behavior of a few devils in the mortgage-backed-securities market, in the end, like a boomerang on the average homeowner.
This is the use of a particular financial product — the credit default swap, the fuel is injected, a spiral into the Great recession included. Legislators and regulatory authorities to the left to sift through the wreckage were forced to accept that their lax approach of the police was our financial markets is flawed. In accordance with philosopher Marshall McLuhan: you went to the future using only your rear-view mirror.
But the luck will change, particularly with respect to credit default swaps. This shift recently prompted the regulatory authorities to peer around a particularly awkward corner of the $13 trillion derivatives market. The Commodity Futures Trading Commission recently issued a much needed warning in response to a possible manipulation of CDS trades of a few of the biggest names on Wall Street.
While many rightly associate to the swaps with the crisis-era mortgage mess, the product of a great and legitimate purpose to serve: to enable businesses and traditional investors values for the hedging of credit risk in relation to your assets, starting from agricultural bonds raw materials to the company.
For example, a portfolio manager and a fixed income is running-the Fund may purchase CDS-connected issued with a bond from a company, because he is for “insurance” in the event of a bankruptcy. A reliable CDS market can help the investor confidence in companies to invest, to raise the otherwise may not be able to affordable capital.
After the difficulties caused by the past, the devils in the derivatives market, it is encouraging that the CFTC was quick to call out the potential abuse and manipulation in the CDS market today.
At the end of April, the Agency issued an opinion to the Blackstone Group’s GSO Capital Partners, which was to get to finalizing a deal with homebuilder Hovnanian Enterprises, which is perfectly solvent companies to intentionally default on a small part of the debt in exchange for sweetheart refinancing conditions. Not surprisingly, GSO and more than 300 million US dollars in credit default swaps that would pay holds, for the case of Hovnanian default values.
Hovnanian, to have the nearly 500 million dollars appears in your coffers, and took the next step, if one of its wholly-owned subsidiaries waived the payment of interest due on the bonds bought, what people produced in the market as a Standard.
The CFTC sent a message to warn shot across the bow of all the diabolical CDS market-manipulators, in order to approximate the manipulation of these products. The Agency, the statement was clear to say that it made credit events can represent, market manipulation, and can lead to significant damage to the integrity of the CDS market.
In addition, the CFTC claims that it “carefully consider all available measures to ensure the integrity of the market and the fight against manipulation or fraud.” Chairman Chris Giancarlo — who has a great job, in my point of view — a fine point on this recently noting that his staff is also coordinating with the Securities and Exchange Commission. This is a long-awaited development, the market for the benefit of the entire CDS.
For GSO and Hovnanian, you seem to ignore regulator warnings, but my experience is that you do this at your own risk. In this case, the International Swaps and Derivatives Association convenes at the end of the month to decide whether the missed interest payments as a legitimate Standard of Hovnanian. (The CDS buyer does not collect the “insurance” payouts, unless the Association’s checks.)
Fortunately, the ISDA Committee, scheduled to rule on the matter has sufficient justification to shoot the business. For example, it could reasonably conclude Hovnanian subsidiary has waived any payment of interest, as soon as it knowingly purchased the securities that he knew that they are going to default as part of the agreement with the GSO.
The big picture here is that even 10 years later, the lessons of the recession continue to serve as a clear reminder of what can happen in our markets and, in turn, the economy, and if the nefarious actions, the financial devils are allowed to continue. The regulatory authorities should be clear and unambiguous, especially on the fight against the manipulation, to position an efficient and effective markets. If you do it, it’s not only the markets, but our economy and our country benefit.