“I Have Never Experienced This Kind Of Immoral Behavior From A Bank In My Entire Life": Goldman Slammed In Latest CDS Scandal
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(CDS= Credit Default Swaps and imagine taking out an insurance Policy on your neighbor's house and then setting it on fire so you can collect the policy. Literally the same thing by what is described below. However Goldman was merely trying to rescue the positions it already had written these for
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Not a month seems to pass any more without a major bank or hedge fund getting in hot water for using CDS in a way that was never intended, and now it's Goldman's turn, again.
Three months ago, when the loan market was freezing up**, Goldman struck an unusual deal with a group of hedge funds to offload a buyout loan from its books, saving the bank and the funds from potential losses. What was odd, is that Goldman was also serving as the underwriter to the company issuing the loans…while at the same time arrenging a "kicker" to loan buyers by having them bet on the potential insolvency of its own client.
Now, this bizarre arrangement is at the center of a lawsuit accusing the Wall Street giant of gorging on fees while also exposing the acquirer in the buyout, United Natural Foods, to hedge-fund sharks who stand to reap major profits if the company collapses as a result of the incremental debt: according to Bloomberg, United Natural had hired Goldman Sachs for the takeover and is now demanding at least $52 million - and potentially much more - from the bank.
As hinted above, Wall Street's latest drama once again revolves around the increasingly dysfunctional credit-default swaps market, where hedge funds and others wager on the ability of companies to keep up with their borrowings, only the traditional role of CDS as bankruptcy hedges has long ago given way to more "creative" applications. Indeed, as Bloomberg notes, "again and again, the contracts have played strange roles in debt transactions, sometimes straining allies or encouraging unlikely alliances."
According to the lawsuit, Goldman adjusted the terms on a $2 billion financing deal in a way that allowed hedge funds to reap a windfall from their CDS bets, as first reported by Bloomberg in October. United Natural said it initially heeded Goldman's advice, agreeing to the changes so it could complete the takeover of grocery chain Supervalu.
Where things got complicated, is that Goldman enlisted the help of hedge funds that had been betting on Supervalu’s demise. Those funds now stand to benefit if United Natural struggles to repay. That was just the beginning: United Natural also alleges that the bank unfairly withheld fees, burdened it with additional interest expenses and relied on “scare tactics” by a senior banker to back it into a corner.
Meanwhile, hedge funds were facing major losses too after having bet against Supervalu’s debt by loading up on CDS, but the company’s sale threatened to create a situation known as an orphaned CDS contract, a situation similar to the infamous McClatchy fiasco (one which we profiled extensively in "Orphan CDS, Manufactured Credit Events, Insufficient Deliverables: What The Hell Is Going On In The CDS Market?"). Because new debt being issued to purchase Supervalu would have paid down the grocer’s obligations, it could have made swaps linked to Supervalu effectively worthless - referencing an entity with no significant borrowings - even as the default risk of the purchaser, United Natural, soared. However, due to the specific nature of the CDS contract, there was no continuity in tracking the referenced entity, as such those who were betting on a Supervalu default would end up with nothing, even if the successor company did eventually file for bankruptcy.
The key was to restore the value of the roughly $470 million of net CDS wagers linked to Supervalu’s debt. While the cost of the Supervalu derivatives had plunged through most of last year, by tweaking the loan docs to make Supervalu a co-borrower on the new financing, Goldman sparked a surge in the value of the swaps.
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**Did you hear any mention of this in the MSM.
You did hear because it was posted as it was freezing up
rest at link
https://www.zerohedge.com/news/2019-02-03/i-have-never-experienced-kind-immoral-behavior-bank-my-entire-life-goldman-sued