Making money in obscure places in financial markets

[newwurldmn]

Ok I have been writing three posts about this now. My problem is not with Sears. Sears can do whatever it wants. It's with ESL that I have problems with. Companies answer to its shareholders but that doesn't mean shareholders like ESL get to engage in non-arms' length transactions from which they are the exclusive beneficiary using someone else's money. You want to help out a company, fine, do it on your dime, don't do it with someone else's money. ESL is essentially using those credit derivative buyers' money to finance Sears' buyout of those cheapest debts. And everybody is a shareholder of Sears. What about the other shareholders of Sears? Why is it they are not able to profit from these "higher quality financing"? How about ESL let the rest of the shareholders of Sears share in the profit that they are getting from these credit derivative sales?

If those shareholders were short those cds’s they would profit directly.

The other shareholders are certainly no worse off and likely better off because sears received better funding which makes the odds of bankruptcy are that much less. But that’s not your real gripe.

Your gripe is that it feels dirty and so there must be something immoral. I agree that if feels dirty. Esl used its position at sears to profit at the expense of the credit derivatives holders. But how is this immoral? And while it feels dirty, it's not. ESL's credit derivs position and their loan to sears are two separate transactions.

Often, before someone buys out a company - they will purchase a bunch of stock. And then they will announce their intention to buy the company. The shareholders who sold stock to this would-be acquirer lost out of the subsequent gains. Should that be illegal?

A legitmate example of your gripe (the other shareholders not profiting) is greenmail. That used to be legal (it still might be). In that scenario one shareholder suffers at the benefit of another shareholder. That's a problem.

 

[JSOP]

If those shareholders were short those cds’s they would profit directly.

The other shareholders are certainly no worse off and likely better off because sears received better funding which makes the odds of bankruptcy are that much less. But that’s not your real gripe.

Your gripe is that it feels dirty and so there must be something immoral. I agree that if feels dirty. Esl used its position at sears to profit at the expense of the credit derivatives holders. But how is this immoral? And while it feels dirty, it's not. ESL's credit derivs position and their loan to sears are two separate transactions.

Often, before someone buys out a company - they will purchase a bunch of stock. And then they will announce their intention to buy the company. The shareholders who sold stock to this would-be acquirer lost out of the subsequent gains. Should that be illegal?

A legitmate example of your gripe (the other shareholders not profiting) is greenmail. That used to be legal (it still might be). In that scenario one shareholder suffers at the benefit of another shareholder. That's a problem.

No the whole thing is not dirty. You still didn't get my point. What ESL is doing in helping Sears restructuring and in turn keeping it solvent longer is not a bad thing; it benefits everybody. It's how ESL is going about doing it that I have problems with and it's not that it feels dirty; it IS dirty. Like I said before, if they want to help Sears restructuring, they should've used their own money, not someone else's without their permission. The way how ESL manipulated the credit derivatives market, they basically had this "restructuring" of Sears' debt essentially financed by the buyers of the credit derivatives while ESL gets all the credit and glory of "helping Sears restructuring and keeping it solvent" and the tremendous profit from shorting the credit derivatives. It's a "win win" situation for ESL, but it's a "lose all" situation for the credit derivatives buyers single-handedly orchestrated by ESL and that's not fair. I told you the difference between the announcement effects of stock sell/buy purchase and this direct manipulation in my previous post. You obviously didn't read it and/or understand it. I will spell it out further for you. In the stock announcement situation, there is no manipulation because there is no direct control of the outcome; everybody in the market has equal chance in making/lose money whereas in this case, ESL is able to directly control the outcome through the manipulation to benefit themselves exclusively. You want to create a market in credit derivative then you have to let everybody have a chance to play in the market and win; you can't turn around to do something to directly manipulate the price to create unfair advantage for yourself. That's called unfair dealing and violation of fair market.

With all the profit that ESL's made on shorting the credit derivatives, I hope they are prepared to spend them all responding to CFTC's investigation and lawsuits from all the credit derivatives. I know if I am one of the buyers, I would definitely sue.

 

[newwurldmn]

No the whole thing is not dirty. You still didn't get my point. What ESL is doing in helping Sears restructuring and in turn keeping it solvent longer is not a bad thing; it benefits everybody. It's how ESL is going about doing it that I have problems with and it's not that it feels dirty; it IS dirty. Like I said before, if they want to help Sears restructuring, they should've used their own money, not someone else's without their permission. The way how ESL manipulated the credit derivatives market, they basically had this "restructuring" of Sears' debt essentially financed by the buyers of the credit derivatives while ESL gets all the credit and glory of "helping Sears restructuring and keeping it solvent" and the tremendous profit from shorting the credit derivatives. It's a "win win" situation for ESL, but it's a "lose all" situation for the credit derivatives buyers single-handedly orchestrated by ESL and that's not fair. I told you the difference between the announcement effects of stock sell/buy purchase and this direct manipulation in my previous post. You obviously didn't read it and/or understand it. I will spell it out further for you. In the stock announcement situation, there is no manipulation because there is no direct control of the outcome; everybody in the market has equal chance in making/lose money whereas in this case, ESL is able to directly control the outcome through the manipulation to benefit themselves exclusively. You want to create a market in credit derivative then you have to let everybody have a chance to play in the market and win; you can't turn around to do something to directly manipulate the price to create unfair advantage for yourself. That's called unfair dealing and violation of fair market.

With all the profit that ESL's made on shorting the credit derivatives, I hope they are prepared to spend them all responding to CFTC's investigation and lawsuits from all the credit derivatives. I know if I am one of the buyers, I would definitely sue.

First ESL doesn’t create the cds market. The banks do as they make the markets and are the counter parties.

Second all this talk about using your own money to be allowed to get the glory reeks of moralism.

Everyone in the market isn’t entitled to an equal chance at making money. The purpose of the market is to create avenues for financing corporations. Everything else is either greasing the wheels For that purpose or is basically gambling.

There is no obligation to the cds holders. These are over the counter side bets (like using an underground bookie for sports gambling). They aren’t protected by the SEC like holders of registered securities. and the traders in that space know this.

I’m sure cds holders will sue. That’s part of the game too. I’m sure they will lose.

 

[JSOP]

First ESL doesn’t create the cds market. The banks do as they make the markets and are the counter parties.

Second all this talk about using your own money to be allowed to get the glory reeks of moralism.

Everyone in the market isn’t entitled to an equal chance at making money. The purpose of the market is to create avenues for financing corporations. Everything else is either greasing the wheels For that purpose or is basically gambling.

There is no obligation to the cds holders. These are over the counter side bets (like using an underground bookie for sports gambling). They aren’t protected by the SEC like holders of registered securities. and the traders in that space know this.

I’m sure cds holders will sue. That’s part of the game too. I’m sure they will lose.

You are still not getting it. I am not talking about it as an obligation to the cds holders but there is such thing as fair dealing and all parties in any business endeavour, not just in financial investments are expected to uphold. Just because SEC is not there watching over it doesn't mean that you can do whatever to screw your counterparties. Even though everyone in the market is not entitled to equal chance at making money but the market has to be structured in a way that everybody at least APPEARS to have an equal chance to make money especially free of direct undue influence like what ESL did otherwise we call the market being rigged. True people try to skew the chances to their favour to make money in the market all the time through stock announcement, HFT, being closer to the exchange an etc., but NOT UNDUE DIRECT influence that changes the price itself guaranteed that cds buyer in this case has no chance of making money; they have no way to hedge, they have no way to wait it out like when we do when we got stuck with a losing position like shorted a stock of a company when Buffett has just a positive announcement on.

Credit derivatives buyers basically just handed over a pile of money to ESL for free. There is no free lunch in this world. Nobody should have to just hand over a wad of cash with nothing in return (except parenting perhaps and even with parenting, one gets the cute photos, the sweet memories and etc.). That's why CFTC is investigating even though it's outside of SEC's jurisdiction. And there is probably lawsuits coming. It's not a game. It's a way for the CDS buyers who are screwed to get something back.

 

[CSEtrader]

Well this is a complicated one. From a business ethics point of view, the hedge funds is DEFINITELY guilty of manipulation. I mean if we are not allowed t But from a business point of view,

There cannot be a difference between business and ethics. Real business is always ethical. Otherwise, it is robbery - real business is settled up some very pure aiming of its founders (Rotshields, Steve Jobs, Mark Zuckerberg and the star Amazon's founder Jeff Besos, just first few coming in my mind), the rest are just excuses by the people entitled to do something but not yet performed, so trying to justify their overbills etc.
As you can see, I do not hold any record of how hard and cruel and bad you were on me, when I came here to try to get a help. I am trying to help you to find your consciousness, to have your inside answer your questions, but in order to get there it is a job, it is a journey.
.

 

[newwurldmn]

You are still not getting it. I am not talking about it as an obligation to the cds holders but there is such thing as fair dealing and all parties in any business endeavour, not just in financial investments are expected to uphold. Just because SEC is not there watching over it doesn't mean that you can do whatever to screw your counterparties. Even though everyone in the market is not entitled to equal chance at making money but the market has to be structured in a way that everybody at least APPEARS to have an equal chance to make money especially free of direct undue influence like what ESL did otherwise we call the market being rigged. True people try to skew the chances to their favour to make money in the market all the time through stock announcement, HFT, being closer to the exchange an etc., but NOT UNDUE DIRECT influence that changes the price itself guaranteed that cds buyer in this case has no chance of making money; they have no way to hedge, they have no way to wait it out like when we do when we got stuck with a losing position like shorted a stock of a company when Buffett has just a positive announcement on.

Credit derivatives buyers basically just handed over a pile of money to ESL for free. There is no free lunch in this world. Nobody should have to just hand over a wad of cash with nothing in return (except parenting perhaps and even with parenting, one gets the cute photos, the sweet memories and etc.). That's why CFTC is investigating even though it's outside of SEC's jurisdiction. And there is probably lawsuits coming. It's not a game. It's a way for the CDS buyers who are screwed to get something back.

So you are saying this transaction reduces the integrity of the credit markets? How?

Cds holders should have realized that the company can recapitalize. Would have been less wrong if sears got a loan from government of Singapore investment Corp or Ontario teachers pension fund?

Finance at the level is a game theory exercise. This is how finance is played in the capital structure arbitrage world.

These cds holders were outmaneuvered in this situation. There are many where they won (often at the expense of the taxpayers in 2008).

 

[JSOP]

So you are saying this transaction reduces the integrity of the credit markets? How?

Cds holders should have realized that the company can recapitalize. Would have been less wrong if sears got a loan from government of Singapore investment Corp or Ontario teachers pension fund?

Yes companies are free to recapitalize and that is a risk that credit derivative buyers are well aware of but the recapitalization should NOT have been financed by the very SELLER of the credit derivatives that they hold especially when the seller is the majority shareholder of the company has all the power to force the company. The conflict of interest is glaringly clear I am really surprised that you can't see it. This is WHY they make you declare on every single form whether you own 10% of a company or are a director of a company. If the government of Singapore Investment Corp of the Ontario Teacher's Pension Fund did not sell the credit derivatives in the first place, of course it's not wrong if the restructuring is financed by them because they are not the one who stand directly to benefit from it. ESL is not just benefitting from Sears being solvent as Sears' shareholder, no it stands to profit EXCLUSIVELY and massively from the shorting of the credit derivatives.

Finance at the level is a game theory exercise. This is how finance is played in the capital structure arbitrage world.

Doesn't have to be if everybody does business with good faith and true intention which is how you are supposed to do business with people regardless whether it's investing or financing. But this has nothing to do with financing. You are changing the topic here. What ESL has done has very little to do with financing; what they have done is unfair dealing. In the financial market, you are either the investor who has no way to control how your investment goes (you can influence but NOT control) or be the ones who get to control how the investment goes but you can't invest in it. You can't be both. When you are, you are guilty of unfair dealing and manipulation and it's not allowed. Very simple. This is why there is Chinese wall between the brokerage and the investment banking divisions in a brokerage firm and the same reason why government officials cannot own companies while they are in office.

These cds holders were outmaneuvered in this situation. There are many where they won (often at the expense of the taxpayers in 2008).

No it's because ESL is unscrupulous. Those CDS holders made an honest bet on a situation which everybody is entitled to do; it is not their fault that Sears are in financial trouble in the first place and it was even less the credit swap buyers' fault back in 2008 when the whole government, banks, brokerage companies, credit rating agencies were all in cahoots engaging in fraud and lies in the mortgage business that ultimately brought their own downfall. The credit swaps buyers certainly didn't do anything to instigate it. It wasn't like they bought the CDS and then turned around and underwrote more mortgages to mentally ill homeless people. Taxpayers' bailout is another story. Don't blame on the credit swap buyers. Blame on the government. I was all for letting the banks fail. Nobody should be too big to fail but the government chickened out. That's not the CDS holders' problem.

 

[newwurldmn]

Yes companies are free to recapitalize and that is a risk that credit derivative buyers are well aware of but the recapitalization should NOT have been financed by the very SELLER of the credit derivatives that they hold especially when the seller is the majority shareholder of the company has all the power to force the company. The conflict of interest is glaringly clear I am really surprised that you can't see it. This is WHY they make you declare on every single form whether you own 10% of a company or are a director of a company. If the government of Singapore Investment Corp of the Ontario Teacher's Pension Fund did not sell the credit derivatives in the first place, of course it's not wrong if the restructuring is financed by them because they are not the one who stand directly to benefit from it. ESL is not just benefitting from Sears being solvent as Sears' shareholder, no it stands to profit EXCLUSIVELY and massively from the shorting of the credit derivatives.



Doesn't have to be if everybody does business with good faith and true intention which is how you are supposed to do business with people regardless whether it's investing or financing. But this has nothing to do with financing. You are changing the topic here. What ESL has done has very little to do with financing; what they have done is unfair dealing. In the financial market, you are either the investor who has no way to control how your investment goes (you can influence but NOT control) or be the ones who get to control how the investment goes but you can't invest in it. You can't be both. When you are, you are guilty of unfair dealing and manipulation and it's not allowed. Very simple. This is why there is Chinese wall between the brokerage and the investment banking divisions in a brokerage firm and the same reason why government officials cannot own companies while they are in office.



No it's because ESL is unscrupulous. Those CDS holders made an honest bet on a situation which everybody is entitled to do; it is not their fault that Sears are in financial trouble in the first place and it was even less the credit swap buyers' fault back in 2008 when the whole government, banks, brokerage companies, credit rating agencies were all in cahoots engaging in fraud and lies in the mortgage business that ultimately brought their own downfall. The credit swaps buyers certainly didn't do anything to instigate it. It wasn't like they bought the CDS and then turned around and underwrote more mortgages to mentally ill homeless people. Taxpayers' bailout is another story. Don't blame on the credit swap buyers. Blame on the government. I was all for letting the banks fail. Nobody should be too big to fail but the government chickened out. That's not the CDS holders' problem.

So you are saying that because ESL would benefit from selling CDS, they should not be allowed to recapitalize the underlying company (of which they are a major shareholder)? If so, why not?

Does that mean that Warren Buffet can't announce he owns stock in a company because he knows it will burn the shorts who are short it? Does that mean that Fidelity can't pull their borrow on a stock because they know it will create a short squeeze hurting people who are making an honest bet that a stock will go down?

Second, the buyers of the CDS probably didn't directly trade with ESL. They likely traded with a bank who looked for someone to offset the risk and ESL was a willing counterparty. Are you saying, Banks should not trade with counterparties who might cost their other counterparties money? If so, why not? Do you have an obligation to not cause me to lose money on my positions in the market?

If the buyers had traded directly with ESL, shouldn't they have known that they created their own agency problem? Credit traders are smart and sophisticated.

The way I see it there are three issues:
1. The morality of earning against someone else (that's really an opinion we can differ on)
2. The legality of such a transaction (likely no issue here as CDS are not regulated and ESL/SHLD probably did all the right things to eliminate their risk)
3. The practical impact on the market : this could reduce confidence in the market (like the LIBOR scandal or the Facebook IPO). I think that's a legitimate issue, but in the world of institutional finance, the participants will adapt and either change the contractual language or price this risk in.

You need to stop thinking of the markets as a sport or as a casino. It's not a game. It's about participants sourcing financing; while others trying to exploit opportunities that exist as a result. In this case, Sears was part of the first category; ESL was part of the first and second category; and your hero CDS buyers were only part of the second.

 

[JSOP]

So you are saying that because ESL would benefit from selling CDS, they should not be allowed to recapitalize the underlying company (of which they are a major shareholder)?

They can but they should not have engaged in shorting the credit derivatives.

If so, why not?

1) Conflict of Interest 2) Unfair dealing 3) Disruption of orderly market 4) Fraud (for lack of disclosure)

Does that mean that Warren Buffet can't announce he owns stock in a company because he knows it will burn the shorts who are short it? Does that mean that Fidelity can't pull their borrow on a stock because they know it will create a short squeeze hurting people who are making an honest bet that a stock will go down?

This, I am going to quote one of my previous posts.

In the stock announcement situation, there is no manipulation because there is no direct control of the outcome; everybody in the market has equal chance in making/lose money whereas in this case, ESL is able to directly control the outcome through the manipulation to benefit themselves exclusively. You want to create a market in credit derivative then you have to let everybody have a chance to play in the market and win; you can't turn around to do something to directly manipulate the price to create unfair advantage for yourself. That's called unfair dealing and violation of fair market.

Second, the buyers of the CDS probably didn't directly trade with ESL. They likely traded with a bank who looked for someone to offset the risk and ESL was a willing counterparty. Are you saying, Banks should not trade with counterparties who might cost their other counterparties money? If so, why not? Do you have an obligation to not cause me to lose money on my positions in the market?

If the buyers had traded directly with ESL, shouldn't they have known that they created their own agency problem? Credit traders are smart and sophisticated.

The banks have nothing to do with it. How CDS was bought, whether it was through banks or directly from ESL is irrelevant. The issue here is how ESL underhandedly manipulated the CD market to their advantage using their majority shareholder position. A more likely scenario though is ESL who went to the banks first to sell a whole bunch of CD's to raise money to turn around to give to Sears for them to retire cheap debts and thus keeping the company solvent longer since they are the majority shareholder and if Sears fails, they would be the one who would be holding the largest bag of crap. And they think they can avoid that at the expense of others through manipulation.

The way I see it there are three issues:
1. The morality of earning against someone else (that's really an opinion we can differ on)

This is not an issue of morality of earnings against someone else. This is an issue of ESL deliberately manipulating the market or a venue to earn against someone else. I have no problem with people earning against someone else like buying a stock and then selling it at a profit later on at someone else's expense. But if that stockholder did something that directly pushed the price up like cornering the market or those HFT practices like layering or quote stuffing, then I would have a problem with.

2. The legality of such a transaction (likely no issue here as CDS are not regulated and ESL/SHLD probably did all the right things to eliminate their risk)

What ESL did is illegal. It's unfair dealing and violation of fair market. CFTC is investigating. Whether CD is regulated or not is again irrelevant. And in fact CD IS regulated, by the CFTC because it's a derivative.

3. The practical impact on the market : this could reduce confidence in the market (like the LIBOR scandal or the Facebook IPO). I think that's a legitimate issue, but in the world of institutional finance, the participants will adapt and either change the contractual language or price this risk in.

This I can agree with you. There should be more disclosure and transparency implemented to know the counterparties and also limit on who could be counterparties.

You need to stop thinking of the markets as a sport or as a casino. It's not a game. It's about participants sourcing financing; while others trying to exploit opportunities that exist as a result. In this case, Sears was part of the first category; ESL was part of the first and second category; and your hero CDS buyers were only part of the second.

I never thought of market as a sport or a casino (although it is, just a very regulated one). You are the one who thinks this is a sport and a game

These cds holders were outmaneuvered in this situation. There are many where they won (often at the expense of the taxpayers in 2008).

The term "outmaneuvered" is a wrestling term and the verb "won" is a term used in games where people win or lose.

But regardless what you think of it, whether it's a business or a finance, or a sport, or a game or even a casino, the bottom line is you still need is fair dealing which ESL did not engage in and for that they will PAY.

 

[MoreLeverage]

Doesn't sound illegal to me, but it's not our opinions that matter. The courts will sort it out and let us know in a couple years. I remember a case where the CDS market sold so much insurance on some company's debt and at such high rates that the CDS insurance writer took half the proceeds and basically gave it to the company to repay those loans and kept the rest. Caveat Emptor.