Friday, December 6, 2013

The Daily Show Shines a Light on Money Management

The Daily Show Shines a Light on Money Management

Where should investors turn to understand some of the more esoteric and unsavory ways of making money?  You might try The Daily Show with Jon Stewart.  In the second segment of yesterday’s show Samantha Bee explained Blackstone’s creative use of a credit default swap to generate a highly questionable profit.[1]  The story was based on some very good reporting by Stephanie Ruhle, Mary Childs, and Julie Miecamp  of Bloomberg News[2] about six weeks ago.

According  to Bloomberg, here’s what Blackstone orchestrated:

The unit of Blackstone Group LP (BX) structured the loan in a way that would lead to a payout on swaps it held. . . The contracts were triggered on Sept. 18 after Codere [a Spanish gaming company] delayed an interest payment by two days to comply with the loan terms. GSO held 25 million to 30 million euros of the swaps, meaning it may have made at least 11.4 million euros ($15.6 million), according to one of the people and data compiled by Bloomberg.

In plain English,  Blackstone bought insurance on a loan they made to Codere.  The payment on the insurance policy occurred because the company was required under the loan terms to delay making an interest payment.  Conveniently, that delay triggered the insurance payout.  If it still doesn’t make sense, think about it this way.  It is somewhat like buying arson insurance on the addition to your house, and being able to collect on the policy when you burn down the addition, except what Blackstone did is legal.

Lengthy Mutual Fund Meeting 2

The Daily Show demonstrated that there was virtually no coverage of the story by financial programs or publications other than the original story.  Ms. Bee’s numerous efforts to generate interest in the story were meant as demonstration that the technical and jargon-filled aspects of Wall Street’s activities permit many of their practices to fly under the media radar screen.

However, The Daily Show did not go far enough.  I don’t think we can expect either mass media or specialized financial publications to catch these abuses when institutional investors let these types of practices exist.  GSO Capital Partners, a major subsidiary of Blackstone, conjured up the credit default scheme.  Who are GSO’s investors?   In less than ten minutes of Googling, I found out that North Carolina, South Carolina, CALPERs, Florida SBA, Oregon, and New York City are GSO investors.    While I can’t tell which GSO fund made the investment described by Bloomberg, it’s clear that sophisticated pension investors have committed billions of dollars to GSO, and they are either unaware or indifferent to the manager’s methods. 

We shouldn’t just single out GSO or credit default swaps.  As public funds continue to increase their exposure to alternative investments they will inevitably become more exposed to the unseemly ways in which some money managers generate returns.  Last May I wrote about personal loan legislation in NC, which is now the law (“Our State Senate at Work:  Personal Loans for Hedge Funds [May 6, 2013]”, and how it would create a new supply of high yield debt for public funds pursuing credit strategies.

There are a lot of ugly nooks and crannies in the world of money management.  So long as it is legal and managers are making money the media, public officials, and pension executives are not going to ask questions.  Thank you Samantha Bee for bringing this to our attention.


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