Speaking of insider trading of credit-default swaps (you just can’t get enough!), Felix Salmon of Reuters digs up a prescient Bloomberg story about that from 2006.
Here was Bloomberg’s headline:
Credit-Default Swaps May Incite Regulators Over Insider Trading
Salmon notes that it took thirty-one months for the SEC to get around to making its first charges in the area. And read the Bloomberg story—the Berg put the ball right over the plate, gift-wrapped, on a tee:
While Apollo Management and Texas Pacific Group were in supposedly secret talks to acquire Harrah’s Entertainment Inc. for $15.1 billion, the takeover already was a done deal in the market for credit-default swaps.
Seemingly omniscient derivatives traders also determined that Kohlberg Kravis Roberts & Co., Bain Capital LLC, Merrill Lynch & Co. and Thomas Frist would buy HCA Inc. in the weeks before a $33 billion leveraged buyout of the hospital operator was announced. And they did the same thing two weeks before Anadarko Petroleum Corp.’s $21 billion agreement to buy Kerr- McGee Corp. and Western Gas Resources Inc. The debt and equity of these companies barely fluctuated when the price of credit- default swaps based on their bonds climbed as much as 40 percent.
How can you not hit that? To answer my question: You don’t swing at all.
Bloomberg practically begged regulators to delve into this area but was also prescient in noting the “not our problem” aspect:
No one is sure who has oversight of credit-default swaps, financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They’re part of the explosion in derivatives, or contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.
This is also interesting:
A London Business School study last year of 79 North American companies from 2001 to 2004 found “significant” evidence that contracts were moving ahead of news that could affect credit quality.
The rise in the number of hedge funds making loans to companies and protecting their bets with derivatives may be opening holes allowing information to get out, said Timothy Johnson, one of the study’s authors. Hedge funds are private pools of capital that allow managers to participate substantially in the gains on investments made on behalf of clients.
“If you want to get access to information private banks have, you go and buy a piece of a bank loan,” said Johnson, now an associate professor of finance at the University of Illinois at Urbana-Champaign in Champaign, Illinois.
As is this:
JPMorgan Chase & Co., Deutsche Bank AG and Goldman Sachs Group Inc. are the most frequent traders of credit derivatives, a Fitch Ratings survey published last month showed.
So we can assume this is fertile ground for investigators. Get to it.
Meanwhile, a retroactive tip of the hat to this great work by Bloomberg.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.