Hedge funds are accusing Bear Stearns of manipulating the credit default swap market, according to the Wall Street Journal. Basically, Bear Stearns stands accused of bailing out trouble subprime loans in order to avoid having to pay out on credit default swaps it sold to hedge funds. For its part, Bear Stearns denies that it is making decisions about loans based on its swap positions.
The credit default swap market is a relatively young one that has been plagued by suspicions of insider trading and market manipulation. As we discussed here in April, anti-fraud rules familiar from the stock market apply to the credit default swap market but there appears to be no government agency charged with policing the market. In this case, it appears that the matter has fallen to the International Swaps and Derivatives Association, an industry group that represents the various players in the swap market.
It's not clear if anything Bear Stearns is accused of doing violates any rules. The hedge fund accusations of market manipulation appear to be on the order of claims of unsportsmanlike conduct.
The Sure Bet Turns Bad [Wall Street Journal]
Posted by , Jun 07, 2007 11:21AM
It's typical Bear Stearns, what do you expect? Since I worked there for a year, I have seen envelope pushing myself
Posted by Poor Sport , Jun 07, 2007 11:38AM
Poor little hedgies...there is absolutely nothing wrong with protecting your positions, it's called hedging. They're just doing it with the actual loans instead of the CDS on those loans.
Posted by Series7.5 , Jun 07, 2007 11:42AM
This is actually a pretty valid story and what BSC (allegedly) did may actually be criminal, but it will probably be misunderstood by even many on the street not involved in this market and likely go away since the SEC and other regulators probably lack the appetite to pursue it, as the interests of the CDS dealers are aligned with the interests of Congress to alleviate the pressure facing unwise subprime borrowers.
Basically, Bear Stearns stands accused of manhandling servicers into altering how delinquencies are handled on loan packages to avoid tripping default triggers so that they would see favorable step-downs in on the loans where they are basically selling leveraged credit protection to "hedge funds" writ large, and avoid having to pay on that protection.
Posted by hedgie , Jun 07, 2007 11:51AM
Agree with above post.
Posted by Bulging Bracket , Jun 07, 2007 11:57AM
Guys on desks are trading things they don't understand and then blaming their copunterparties when they screwed up. This time, it's the traders' fault, not Bear.
If you were buying the CDS for a hedge, you'd be fine with Bar doing this, since you were long on the underlying asset and the CDS is insurance. If you're speculating in CDSs, then you hate to see the loans not default, but it's your own damn fault for speculating and not knowing the risks (sounds like LTCM not pricing in sovereign risk of ze Russians defaulting, or any emerging market trader thinking that they're dealing with a real, legitimate economy). Maybe they wrote the CDS so that this isn't kosher, but it should be a legitimate operation and the risk needs to be priced in. CFA questions on callable/retractable bonds, warrants, and pref shares take this into account, so why not guys who supposedly know what they're doing on a desk?
I wonder if the hedgies crying would ever trade under a BBL? Probably, then sue if the trade didn't go their way. Pussies. ATLA are scum, don't give them any money. The only nearly decent lawyers are on the finance and patent desks, even rats and cockroaches look down on litigators.
Posted by anon , Jun 07, 2007 12:04PM
There are something like 25 hedge funds crying about this. Supposedly being the most sophisticated investors out there, these people are looking pretty stupid right now.
Ignoring the issue of the swaps, mortgage lenders have every right to help prevent defaults by altering the terms of loans.
As for the effect on CDS contracts, I doubt that Bear Stearns has violated any aspect of their CDS contracts. So this is ENTIRELY the hedge funds' own fault. They didn't do the proper due diligence and/or didn't properly negotiate the contracts, in terms of what does or does not qualify as a "credit event." Apparently these funds had no idea what they were buying when they entered into these swaps.
Posted by Walt , Jun 07, 2007 12:26PM
Hey anon.......care to name those 25? If what you say is truth.....some of us little people (investors) would like to know who to avoid. Wanna help?
Posted by Nice Work , Jun 07, 2007 12:34PM
Information Arbitrage posted about this subject like a week ago, but hey, better late than never.
Posted by Series7.5 , Jun 07, 2007 12:44PM
"Nearly 30 players, including the San Francisco hedge fund Passport Capital, the Dallas hedge fund Hayman Capital, and Deutsche Bank AG's Deutsche Bank Securities" according to
The question here is did Bear amend these loan terms within the scope of what is allowed, or did it coerce the servicer, which is supposed to simply maximize value of the loan itself and to otherwise be agnostic to the size of Bear's CDS book, into altering servicing terms to benefit Bear. If its the latter that would certainly warrant SEC action in the same way that the IB/research scandles did during the tech boom
Posted by , Jun 07, 2007 12:49PM
sorry, according to WSJ
Posted by anon , Jun 07, 2007 12:51PM
Walt, sorry I don't know the names of the firms. Last week FT reported that about 25 fund were involved.
Posted by BSD , Jun 07, 2007 12:53PM
Series7.5,
You do realize that the SEC has no governance over CDS markets? This is just a case of crybaby hedgies who didn't fully understand what they were getting into and are desperate to get some money back before their investors pull out for the money shot. At most Bear can get a slap on the wrist from ISDA.
Posted by Series7.5 , Jun 07, 2007 1:06PM
I do realize that, I also know from first hand experience that the SEC still has the ability to extract a pound of flesh for nefarious and potentially criminal business practices when it is politically expedient
of course in this case it is not and when you are printing money like bsc this sort of thing is just a cost of doing business anyway
Posted by BSD , Jun 07, 2007 1:21PM
BSC printing money? Last time I checked they were underperforming the S&P and all the comps (GS, JPM, MS, LAZ and even LEH and MER). The dirty bear has some issues to work out, but I don't think they're in the wrong here.
Posted by Series7.5 , Jun 07, 2007 1:37PM
you might want to look at the performance of its mortgage loans and trading businesses over this last cycle, makes a small payout like this to a bunch of hoodwinked hedge funds seem like peanuts and they will do it again through the next cycle. james cayne and any broker ceo will take that kind of performance any day of the week, that is why all these companies are BUYING subprime originators here instead of exiting the business, they all know they will need the ability to have an in-house loan factory
Posted by de Cosmos , Jun 07, 2007 1:38PM
I'm shocked, shocked to find that manipulation is going on in here!
Posted by BSD , Jun 07, 2007 2:34PM
Point taken, Series 7.5. I just checked its overall performance of the firm.
Posted by The Corner , Jun 07, 2007 9:25PM
If it's worth it in the papers, the SEC will put some investigations together and try to penalize someone. They'll say its a conflict of interest or say it went over the Chinese Wall when they opened up the chance for the swaps desk to be in cahoots with the MBS. No worries though, most regulators went to one CUNY/SUNY or another so it will take them a while.
TC