Posts Tagged ‘cds’

Update: New York Investigating CDS Brokers

Thursday, November 13th, 2008

Update: New York Investigating CDS Brokers

As we reported yesterday, the New York Attorney General and the Southern District of New York have teamed up to investigate allegations of wrongdoing with respect to credit-default swaps. The AG’s office is now reported to have subpoenaed trading data and communications from several interdealer brokers, small firms that facilitated the swaps and other trades.

A CDS is a form of insurance, though contractual in nature and not regulated. Essentially, the CDS buyer wants to protect a debt investment or asset. In return for fees from the buyer, the CDS seller agrees to make a payment if the underlying debtor defaults or goes bankrupt.

CDS contracts enabled the securitization of subprime mortgages into tranches that could be rated as investment-grade. If underlying asset values dropped, the CDS payment would still net a profit. Presuming, of course, that the CDS seller actually had the wherewithal to make the necessary payment.

Interdealer brokers earned fees from facilitating CDS deals between financial institutions. Buyers and sellers need to keep their bargaining positions secret from each other, which makes direct negotiation difficult. For a fee, an interdealer broker puts buyers and sellers together, while keeping the identities of the parties a secret from each other.

Law enforcement is now investigating whether interdealer brokers were breaking the rules, and disclosing information that they existed for the purpose of keeping secret. Also under investigation is the possibility that interdealer brokers were giving out false information, so as to manipulate CDS prices. These CDS prices in turn had a huge effect on the share values and bond prices of major financial institutions.

Wave of White-Collar Investigations is Coming

Wednesday, November 12th, 2008

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“The nation’s top white-collar criminal defense practices are receiving a steady flow of inquiries from clients embroiled in the ongoing credit crisis,” reports the National Law Journal. This is consistent with reports we have heard within the white-collar defense community.

With the economy continuing to take hits from the financial sector, there seems to be a growing demand for blame. Billions of dollars in pensions and retirement funds have disappeared, the money supply is crippled by banks refusing to extend credit, and jobs and tax revenue are at stake.

As the public and its elected officials call for punishment, state and federal prosecutors are launching investigations to see whether anyone broke the law. Anyone involved with complex debt instruments, which appear to have been responsible for much of the vanished wealth, ought not to be surprised to find themselves part of a criminal or regulatory investigation.

As we previously reported, Lehman Brothers executives are already being looked at. And of course the Eastern District of New York has already indicted two managers of the Bear Stearns subprime mortgage hedge funds. But that, our sources tell us, is only the tip of the iceberg.

Credit-default swaps, which enabled much of the subprime hedge fund investments, are now the focus of a joint investigation being brought by the New York Attorney General and the Southern District of New York.

The SEC has also begun taking action in investigations that had appeared to be dormant. Of particular interest to the SEC would be whether executives made misleading statements to investors or analysts about the financial health of their funds or institutions.

“Attorneys report hearing from clients,” reports the NLJ, “who are either already in receipt of subpoenas from federal and state investigators, or who are worried about what the mail will bring. Every lawyer interviewed agreed that their clients — including those confident they kept within the law — would be wise to anticipate that the government will cast a very wide net.”