The silly Greek CDS investigations

By Felix Salmon
March 4, 2010
US Justice Department and the European Commission both announce investigations into the dastardly ways of hedge funds making bets against the euro, less than a week after the meme broke, you can be sure that you're looking at pure politics and zero substance. The closest thing to a smoking gun here is a dinner:

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When the US Justice Department and the European Commission both announce investigations into the dastardly ways of hedge funds making bets against the euro, less than a week after the meme broke, you can be sure that you’re looking at pure politics and zero substance. The closest thing to a smoking gun here is a dinner:

The U.S. Department of Justice is asking hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests sent to managers who attended a dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co. on Feb. 8.

Now in theory, it’s entirely possible that a bunch of hedge fund managers talked about the euro on February 8 and decided that they were going to conspire to short both the euro and Greek debt, in the theory that a panic in Greece would drive up the value of their shorts there, and also drive down the value of the euro.

Except if that actually happened, they were spectacularly unsuccessful. Remember this chart?

201003031918.jpg

To a first approximation, February 8 was pretty much the point at which Greek spreads were at their all-time high, and the smart money was going long Greek debt, not short it. As for the euro, it basically hasn’t moved since that date: it closed on Feb 8 at 1.3643, and it closed today at 1.3695.

These investigations will cost US and EU taxpayers a large amount of money, and will probably generate a multi-million-dollar windfall for the hedge funds’ lawyers. And they will achieve absolutely nothing in terms of results. But hey, at least politicians look as though they’re being tough on financiers. That’s got to make it all worthwhile.

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Comments
5 comments so far

“To a first approximation, February 8 was pretty much the point at which Greek spreads were at their all-time high, and the smart money was going long Greek debt, not short it. As for the euro, it basically hasn’t moved since that date: it closed on Feb 8 at 1.3643, and it closed today at 1.3695.”

I agree with the rest of the post, but this sort of thing makes me think that you don’t at all mind eating crow for breakfast, lunch and dinner. Isn’t the claim VERY premature? Yes, Greek bonds have tightened a bit, but this may prove to be a very temporary move. And yes, Euro is temporarily not crashing. But picking a point less than a month ago in time and saying that “that was a low and things will only improve from there on out” is rather naive.

Posted by Y.Alekseyev | Report as abusive

Y.Alekseyev, I’m not saying that at all. I’m saying that neither Greek CDS nor the euro were hammered or even harmed by hedge-fund short-selling attacks after the notorious dinner on Feb 8. That’s all.

You are right that investigation is just stupid and political posture. They could decide just to tax CDS heavily…and avoid any investigation…
http://mgiannini.blogspot.com/2010/03/ma ke-finance-industry-to-pay.html

Posted by M.G.inProgress | Report as abusive

The two charts just show as you said the deterioration of Greece’s creditworthiness. It shows a certain level of correlation but it does not show anything, about causation, which would support the thesis pro or against CDS and lack of basis of any investigation. We would need to see the volume of CDS and the amount of naked CDS.

Posted by M.G.inProgress | Report as abusive

I would like to speak about the CDS prices. I have been monitoring the Greek CDS prices since the onset of the Greek fiscal shock. It is true that the month of Feb 2010 witnessed a brutal price volatility, however, the it was more of a downward volatility. On Feb 8 2010, the 5Y Greek CDS stood at 420.69 bps. Since then it has watered down to little over 300 bps.

Hence, there is no tangible and material evidence that after the Dinner summit hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co, the traders have shorted the 5Y Greek CDS brutally.

I wonder why most of the times regulators look at CDS from the prism of suspicion. After all not all features of CDS are detestable.

Posted by smanjrekar | Report as abusive
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