Blackstone and Codere Prove Wall Street is Still the Worst

Written by Jason Simpkins
Posted December 5, 2013

The Blackstone-Codere story was first brought to light by Bloomberg, but the Daily Show made it front page news.

It's worth a look, because in one fell swoop Blackstone and Codere proved once more that the big banks and asset managers lining Wall Street are nothing more than craven, criminal institutions.

Here's the gist...

You remember credit default swaps?

They're the nasty little financial instruments that undermined the entire global economy a few years ago.

Essentially, they let you bet that a particular person, institution, or country will default on its debt.

They were implemented by big banks, which issued loans they knew borrowers couldn't afford and then profited when those borrowers defaulted. They were also used to turn the screws on Iceland and Greece when those economies collapsed.

You see, the problem with credit default swaps is that they incentivize catastrophe. Imagine if you could invest in a financial instrument that paid you money if your neighbor's house burned down. Given the circumstances, you might be tempted to start the fire yourself.

And that's exactly what Blackstone did.

Blackstone bet that Codere — a company that operates racetracks in Europe — would default on a loan. It then lent Codere $100 million, stipulating that the company miss its first payment. Thus the credit default swaps were triggered, and Blackstone pocketed $15.6 million.

See what Blackstone did there?

They bet that a company would default on its debt, then they lent that company $100 million under the condition that it default on its debt.

And this is all legal.

It's grossly unethical. It makes clever use of an exotic investment vehicle that's wrecked entire economies in the name of profit.

But it's legal.

That's Wall Street for you.

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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