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Recent Blackstone Deal Confirms That The Market Is Rigged

July 20, 2018 Blog

A recent, questionable deal by the Wall Street behemoth, Blackstone has shaken investor confidence in the markets. 

For months now, the Wall Street Journal has been reporting on a shady deal between Blackstone and Hovnanian Enterprises.

One of the largest asset managers in the world, Blackstone offered Hovnanian a low-cost loan and “persuaded the builder to miss a small interest payment in exchange, which would trigger payouts on $333 million in Blackstone’s credit insurance contracts and yield the firm tens of millions of dollars, depending on market factors,” according to one article.

“The insurance contracts Blackstone took out, known as credit-default swaps, typically pay out when a company defaults, usually reflecting dire financial straits,” the Journal reported. “But Hovnanian was healthy enough to pay its debts, so a default would be opportunistic.”

Such financial manipulation is why some investors remain fearful of the stock market, despite its historic 10-year bull run. Who can investors trust when Wall Street fosters such clearly unethical behavior?

Solus Alternative Management, the fund which stood to take a loss if derivative contracts held by Blackstone were tripped, sued to put a hold on the deal.  A judge in January ruled in favor of Blackstone and allowed the transaction to go through.

Banks, hedge funds and the International Swaps and Derivatives Association Industry Group also voiced concern about Blackstone’s strategy, according to the Journal report.

Even the regulators got involved. The Commodities Future Trading Commission, the CFTC, “waged an unusual campaign to get Blackstone to unwind its bet on the credit-default swap”, according to the Journal.

Regulators typically wait for Wall Street to create a mess before jumping into action, so it’s notable that the CFTC took early action in the Blackstone matter.

If Blackstone could create so-called “engineered defaults,” the strategy could have proliferated and distorted the entire credit default swap market.

While the CFTC encouraged the parties to work out a solution, even Blackstone realized they had to make this issue go away for the integrity of the markets. The various parties confidentially settled the matter about a month ago, just before it blew up in their faces.

As with insider trading, every time investors see what looks like a rigged market, investor confidence diminishes.

Thankfully, the CFTC stepped in. Clearly, regulators need to be more proactive to prevent this type of thing from happening again. Investors are counting on it.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.