Does Anyone at S&P Have Links to the Trader Who Bet $1 Billion That the U.S. Would Be Downgraded?

Not that either the SEC or the Holder-led Justice Department would do anything about it. This happened July 21:

Jack Barnes writes : Someone dropped a bomb on the bond market Thursday - a $1 billion Armageddon trade betting the United States will lose its AAA credit rating.

In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.

The massive trade wasn't placed in bonds themselves; it was placed in the futures market.

The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.

The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it.

However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio.

You only do this if you see an edge.

This means someone is confident that the United States is either going to default or is going to lose its AAA rating. That someone is willing to bet the proverbial farm that U.S. interest rates will be going up.

I believe what happened is a debt-ceiling deal was done in Washington and leaked to a major proprietary trader. Everyone knows the debt negotiations in Washington have been an extreme game of brinksmanship between political parties, but now someone knows how that game played out.

This had the hallmarks of one of the largest bond shops in the world knowing something the rest of the market didn't.

The number of shops or even central banks that can take on this level of market risk is extremely small. Some that come to mind are hedge fund manager John Paulson, Bill Gross's PIMCO, and the U.S. and Chinese central banks.

Because it appears there has already been some funny business regarding Standard and Poor's:

An item in Politico's Morning Money caught my eye:

BEHIND THE MUSIC - S&P's John Chambers has met with a number of big investors include Pimco's Mohammed El-Erian. Apparently he is telling them he prefers Reid's plan.

CNN's Erin Burnett also tweets that the "source who met with Standard and Poors says SIZE of Boehner plan is the problem.MIGHT not be enough to avert downgrade,needs to be closer to $3TR all at once."

If these reports are correct, S&P is meeting privately with big investors and giving them information that they are not giving the public about about what their research says, what position they will take, and what they intend to do with regard to a potential credit downgrade of US debt.

This appears to be "selective disclosure" to big investors on the part of Standard and Poor's. And while putting a $4 trillion number on a deficit reduction package might be in violation of the IOSCO code of conduct, "selective disclosure" is in violation of SEC rules.

As Comrade Driftglass likes to say, there is a club and you're not in it. It also appears that this could be retaliation by S&P for the government's considering fraud investigations against them. This being the Obama Administration, the government will, of course, crumple

We are still ruled by sociopaths.

Related: As I noted before, the only risk is a political risk--the U.S. public debt is denominated in dollars. We can't run out of dollars.

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So? the US should have its rating lowered. S&P would lose face completely if they didn't do it.

Roman, S&P's name should already be mud, for the sub-prime thing to begin with. It should be obvious by now that they are not objective judges of these things and only rate what is to their own advantage. Obama should bring the full investigation forward at this point and dare them to try the might of the US vs. their defrauding asses.

By albanaeon (not verified) on 06 Aug 2011 #permalink

They know it, and I think they regret it. It's good that they're trying to do better this time (they were too lenient towards USA anyway IMHO, but still).

An amusing story is that some time in the past, one South American country was mad at one of the rating agencies for *upgrading* their credit rating. When it was low, the country was buying back their debt cheaply and making a good deal on it.

Anyway, it is the US politicians who elevated them to this status, but giving ratings an importance in calculating regulatory capital amounts for banks. If the US attacked rating agencies for daring to downgrade the US debt, it wouldn't exactly inspire confidence in the markets.

I'm very curious about how the markets will respond to this on Monday. Given the crazy-low rates now, it's pretty obvious the market hasn't been worried about the debt. It's very possible the market will continue to not be worried, and rates will stay low. If so, S&P will find itself well along the road to irrelevance.

By Phoebe Fay (not verified) on 06 Aug 2011 #permalink

It's not as if the trading patterns are going to be secret if people who have the information are acting on it. A sophisticated enough trading program would pick up on it and rebalance your portfolio (disclaimer: cancer survivor, too tired to read business porn any more). My financial adviser called his clients with reassurances, but I could see that something was up because a bunch of money shifted from stocks. (It's nice when Quicken can suck your data from your broker.)

So yeah, fraking pirates are still stabbing us in the gut, but they don't get much of a lead once their trades hit. And yeah, I wish the firm had rolled this particular program out before 2008.

A corrupt "rating" agency that rode the bandwagon... without noticing that rating ALL THOSE "special instruments" were listed as AAA. They and all their pals rode that little pony all the way to BIG-BONUS VILLE .

Now we're supposed to take their partisan "concern" seriously? On top of that bad judgement, this same group of "NUMBER CRUNCHERS" got their math wrong. (JUST A COUPLE TRILLION $$ WRONG)

Let's see.. Does that make sense to you? If your company releases an assessment, sure to be poured over by an accountant or two, and you skip on checking the math. What, you left the numbers checking to the senior guy's summer intern?

Not realizing that they were going to be DUMPING on the leader of the free world? And not because of the state of America's actual finances... but because - REPROs and DEMOs can't play nice - we all get penalized.

And even that is just ICING ON THE CORRUPT CAKE... We learn that they leaked the info to insiders? What the incompetence and bad judgement isnot enough? Let's stir in some corruption too?

If the justice department walks passed this this without a sidelong glance. My friends let me whisper something in your ear, the game is rigged and WE THE PEOPLE are ill served, by an economic system, where your public servants and the watchdogs, are on a short leash held by the criminal conspiracy on Wall Street

Where is the political Will to enforce any law ON WALL STREET? Were Elliott Spitzer and Elizabeth Warren the only ones who noticed the criminality on Wall Street. Until these BIGGEST CRIMINALS are indicted all small timers who stole hundreds of thousands and hundreds should claim they are working for Wall Street.

We The People - Don't forget US!

The trader has lost money so far. The yield on the 10yr treasury has fallen 40bp over that time.

Did you notice that on the same day there was a news report that Citigroup closed out their big short trade on the treasuries of almost exactly the same size?


This is not news, because it's not a material to build conspiracy theories from ;-)