Join us
the audit

WSJ: New York Investigates Swaps

The Journal has an interesting story on an investigation into the credit-default swaps market. New York Attorney General Andrew (Spitzer’s Replacement) Cuomo is looking at brokers...
November 13, 2008

Sign up for The Media Today, CJR’s daily newsletter.

The Journal has an interesting story on an investigation into the credit-default swaps market. New York Attorney General Andrew (Spitzer’s Replacement) Cuomo is looking at brokers to see if they manipulated the market.

I’ll venture a guess that ambitious attorneys general—and reporters!—can find a lot of nasty worms by looking under the CDS rock, though I don’t know about this specific case. Any market that’s totally unregulated with trillions of dollars floating around in it and virtually no disclosure would seem a likely candidate for corruption.

Disclosing information about clients’ identities before a trade is, in some cases, considered unethical by other brokers, traders and regulators. Knowledge that a competitor is trying to amass a position could be used to bargain for better pricing on a trade or to undercut other traders’ positions.

Consider a $500 million position in an index of credit-default-swaps contracts. A move of 0.01 percentage point, or one “basis point,” typically can amount to a $460 gain or loss per $1 million traded. If an index moves 0.20 percentage point — as it can on especially volatile days — a trader’s book could swing by $4.5 million.

Yet the opaque trading environment has made it easier for Wall Street banks to mark up prices charged to outside buyers, which in turn has made CDS trading a huge profit center for the banks. In all, CDS trading amounts to 15% to 25% of top Wall Street firms’ trading revenues, estimates CreditSights analyst David Hendler.

This is one to watch.

Sign up for CJR’s daily email

Has America ever needed a media defender more than now? Help us by joining CJR today.

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.