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Codere

Matt Levine, Bloomberg, Blackstone Made Money on Credit-Default Swaps With This One Weird Trick, here. CDS valuation has always had these large information asymmetries which make it more expensive to be a market maker on any of the proposed CDS exchanges. I don’t think exchange traded vanilla USD interest rate swaps would have this problem to the same degree.

Really, the only reason to cover this story is its majestic beauty. Which is a great reason to cover it, don’t get me wrong; it’s just that aesthetic appreciation of clever derivatives trades is sort of a specialized niche. Certainly “The Daily Show” didn’t muster much admiration and instead spent seven minutes criticizing everyone else for not covering the story. This is wrong. This trade is so lovely that the proper reaction is to love it and cherish it and hold it close to your heart, not to complain that nobody else does.

There’s one other reason not to worry unduly about this trade, and I hesitate to bring it up, but:It’s not really as bad as it looks. I mean, yes, it is very, very clever. It achieves the second-highest goal of any financial engineering, which is to create genuine value for both parties to a transaction (here, Blackstone and Codere) by taking that value from some third party who’s not in the room.So that is great. As Blackstone spins it:

We love Jon Stewart and he continues to be one of the funniest people on TV. But the somewhat boring truth is that we cooperated with Codere and its advisors to save it from bankruptcy or liquidation. We provided capital when no one else would, which allowed the Company to live and fight another day.And they could provide that capital efficiently because they took some value from their CDS writers.

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