The author of this piece, Myret Zaki, has been looking at shadow banking skullduggery for a while. If interested see some of the links in March 26's "ECB warns that shadow banking could trigger next financial crisis".
From NZZ's TheMarket.ch, April 28:
The case of Credit Suisse shows how hedge funds have acquired oversized power on markets and on the fate of entire countries. In the era of speculative shadow banking, finance has become a war of narratives, and of central bank size.
A lot has been said about the Credit Suisse collapse, both on a regulatory and on a political level. But not much has been said about the way speculative attacks can destroy a company’s value in record time. Hedge funds made billions in a few days, betting against Credit Suisse and other banks’ shares, and buying credit default swaps (CDS) to signal an increased likelihood of the bank’s default. This is where the kill started. Targeting a company with these speculative instruments can be fatal, no matter how high its capital ratio is, or how high its probability of default is.
Incentive to harm
Owning CDS on a company or having short positions on it creates an incentive, for the speculator, to see the firm collapse in order to profit from the default payout. The speculators have every interest in seeing a chain reaction, extending to the ultimate client run, that causes the right outcome for their trade. What happened with Credit Suisse was very similar to the speculative raids that targeted Greek debt and, through a domino game, the European banks in 2010-2012.It hasn’t as much to do with the actual financial situation of the target as with the potential to leverage a narrative to spark a massive price movement. As was the case of euro sovereign debt, the vulnerability of Credit Suisse comes from being listed: an unlisted company, even if managed in a worse way than Credit Suisse, could not have been put to death in this manner.
So one should not underestimate the oversized power of a few concentrated players in the CDS market to decide the fate of foreign entities with thousands of depositors. Or to decide the fate of the sovereign debt of foreign countries, whose deterioration will impose austerity on populations of millions.
Weapons of mass deception
The illiquid CDS market, which is easy to manipulate, is a «weapon of mass deception», as Warren Buffett called them. Three-quarters of the CDS trade is aimed at pure speculation and only a quarter is used for insuring against bond defaults. Therefore, CDS can easily be used by hedge funds to spread fear, because they can considerably exaggerate a default risk and certainly aren’t a reliable indicator.The same was attempted with Deutsche Bank as with Credit Suisse. Exploiting existing fears about the solidity of the German bank, hedge funds spread rumors on Twitter that Deutsche Bank had some «counterparty hedging» issue, or commented that «banking doom was back in Europe». Those rumors were spread after hedge funds had sold ahead about 3% of Deutsche’s shares. The CDS spreads conveniently acted as a panic indicator as they rose 25%-30% in a few hours....
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For additional commentary see also:
"Pope says credit default swaps are unethical"
....the Vatican press office with:
“‘Oeconomicae et pecuniariae quaestiones’. Considerations for an ethical discernment regarding some aspects of the present economic-financial system” of the Congregation for the Doctrine of the Faith and the Dicastery for Promoting Integral Human Development, 17.05.2018
Regarding default swaps, if the purchaser doesn't own the underlying instrument they are, straight up, gambling.
And the problem Wall Street has is that gambling is usually regulated at the state level and state's usually say that unless they can get a cut of the action gambling is illegal.....
....MUCH MORE
