Apparently, this is the first insider trading case involving credit default swaps. We think it is high time that these points along the access of financial evil be eliminated permanently. Why fat cats should be permitted to continue victimizing innocent media holding companies with these crude, dangerous and unregulated instruments is beyond us. Enough is enough.
The Securities and Exchange Commission today charged Renato Negrin, a former portfolio manager at hedge fund investment adviser Millennium Partners L.P., and Jon-Paul Rorech, a salesman at Deutsche Bank Securities Inc., with insider trading in credit default swaps of VNU N.V., an international holding company that owns Nielsen Media and other media businesses.
[SEC Press Release]
When credit default swap sellers move to quoting upfront prices, the writing may be on the wall. Today’s graffiti victim? Citi.
Sellers of credit protection in the credit default swaps market were asking to be paid on an upfront basis to insure Citigroup’s subordinated debt on Tuesday, traders said, a sign of greater perceived risks at the third-largest U.S. bank.
Five-year credit default swaps on Citigroup’s subordinated debt were quoted around 9.5 percent upfront, or $950,000 in upfront costs to protect $10 million of debt, plus annual payments of $500,000 a year, according to a trader.
There are so many things to watch during this slow-motion train wreck that it is hard not to miss something. We’re running out of popcorn here, people.
Citigroup sub CDS moves to upfront basis – traders [Reuters] via Alea
Unless you can collect the protection in Swiss Franc, we find it difficult to get our head around credit default swaps on U.S. Treasuries. Surely, if you find yourself actually needing the protection, the last thing you want is U.S. Dollars. And in addition, if you find yourself in a position to expect payment from your counterparty, how likely are you to get paid? And finally, why in the world would the U.S. choose to default, rather than just turn on the printing presses?
First, default, at least domestic default, is much more common than you might think. Reinhart and Rogoff’s The Forgotten History of Domestic Debt is an interesting place to start if the topic compels you.
Second, what constitutes a default isn’t at all clear when you see credit default swap prices thrown about. To the extent the OTC market is a substantial portion, it is difficult to know exactly what constitutes a default.
Third, use of the “no-arbitrage” model to price credit default swap spreads can be misleading, particularly in times of financial crisis. (Sound familiar?)
All this is a gentle way of bracing you for the rumor fact that spreads on credit default swaps on U.S. Treasuries have blown out to triple digits today.
Uh oh.
Now if only we could find a reliable counterparty to write us some CDS contracts denominated in gold.
H.R. 977 (The Derivatives Markets Transparency and Accountability Act of 2009), from the brilliant mind of Rep. Collin Peterson (D-MN), puts restrictions on OTC contracts and would “deny the Federal Reserve the authority to establish regulations or rules with regard to clearing OTC transactions.”
Instead, OTC contracts must either be cleared centrally or reported to the CFTC. Ouch. This would pretty much end the custom options and swap business, making it very difficult to tailor specific instruments for specific risk.
The bill also gives “the CFTC the authority to suspend credit default swap trading, with the concurrence of the president.”
Uh oh.
House bill calls for OTC trading restrictions [Pensions & Investments Online]
AIG has managed, probably despite all efforts, to keep itself in the news the last several weeks. Among other things, it’s been enough to attract the attention of authorities in the United Kingdom. To wit:
American International Group Inc.’s financial products unit, which brought the firm to the verge of collapse with bad bets on credit-default swaps, is being investigated by U.K. regulators for possible criminal conduct.
U.K. investigators are working with authorities in the U.S. who are conducting separate reviews, the Serious Fraud Office said today in a statement. The company is cooperating with the probe, which isn’t related to insurance operations, New York- based AIG said in a separate statement.
“We will use our full range of powers to seek information and to speak to those with an inside knowledge of the company’s operations,” said Richard Alderman, director of the SFO, in the statement. “It is right for us to look into the UK operations of AIG Financial Products Corp., to determine if there has been criminal conduct.”
Know about the inside workings of AIG but the Feds leave a metallic taste in your mouth? You have other options too.
AIG Financial Products Unit Probed by U.K. Regulators [Bloomberg]
The Wall Street Journal finally got around to doing a story on “the other part of AIG,” that being the one that manged to throw cash and assets out the window without touching a Credit Default Swap:
Accounts of AIG’s near collapse have largely focused on soured trades entered into by the company’s Financial Products division. But a close look at the 2,000-employee AIG Investments unit shows how this part of the conglomerate made gambles that helped cripple the firm.
In running the securities-lending business, AIG Investments bought tens of billions of dollars in subprime-mortgage bonds. That turned out to be a riskier approach than some rivals’, who parked cash from securities lending mostly in low-risk or short-term investments such as Treasury securities and commercial paper, according to analysts.
And how would you like to be these guys from AIG Investments right now?
In December 2005, executives from AIG Investments proposed to AIG’s credit-risk managers a set of guidelines for the securities-lending business. One was to invest up to 75% of the cash collateral it received in “asset-backed securities,” according to people familiar with the matter.
Oops.
An AIG Unit’s Quest to Juice Profit [The Wall Street Journal]
