Credit Swaps Investigated by U.S. Justice Department
By Matthew Leising
July 14 (Bloomberg) -- The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks.
“Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,” spokeswoman Teresa Chick said yesterday in an e- mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. “We will work with the Department to provide any information requested of us.”
The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter. U.S. lawmakers plan to regulate the $592 trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression.
“I say Hallelujah that some authoritative body has finally stepped forward to investigate, in a small way, how Wall Street takes advantage of information for its own advantage,” said William Cohan, a former JPMorgan Chase & Co. investment banker and author of “House of Cards,” about the financial crisis. “The fact that they control Markit and it provides information about the prices of credit-default swaps and they’ve benefited from this for many years without any challenge or investigation was outrageous.”
Justice Department spokeswoman Laura Sweeney declined to comment. Markit Chief Executive Officer Lance Uggla didn’t immediately respond to a voicemail left on his mobile phone.
Credit-default swaps -- contracts that protect against or speculate on corporate defaults by paying the buyer the face value of a bond or loan if a company fails to meet its debt agreements -- ballooned almost 100-fold within seven years to represent about $62 trillion by the end of 2007, according to estimates from the New York-based International Swaps & Derivatives Association.
Unregulated trading of the contracts made it difficult for the U.S. to assess how connected banks had become following the failure of Lehman Brothers Holdings Inc. in September. Credit markets froze when the New York-based firm, once the fourth- largest U.S. investment bank, collapsed in the world’s biggest bankruptcy.
The Obama administration now wants all trades of over-the- counter derivatives to be backed by clearinghouses or registered with regulators. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.
“This has to be seen as another step towards regulating the over-the-counter market,” Philip Gisdakis, head of credit strategy at UniCredit SpA in Munich, wrote in a research report published today.
Cohan said the Justice Department action shows that antitrust cases may be used more aggressively by the Obama administration to look into practices in the over-the-counter derivatives market.
“This is one of the first concrete examples of a shifting political wind with regard to Wall Street,” he said in a telephone interview today.
Markit provides derivative and bond data to more than 1,500 customers. It owns the most actively traded credit swap indexes and pricing services in the market, which represents $28 trillion in underlying securities, according to the New York- based Depository Trust & Clearing Corp.
Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry.
JPMorgan is Markit’s largest shareholder, with at least 1.67 million ordinary voting shares out of a total of 14.38 million, according to filings at U.K. Companies House. Bank of America Corp. is the second-largest, with more than 1.52 million shares held through its own units and those acquired in its purchase of Merrill Lynch & Co. last year. Royal Bank of Scotland Group Plc owns at least 1.35 million shares after its purchase of ABN Amro Holdings NV, while Goldman Sachs Group Inc. has about 1.11 million shares, the filings show.
JPMorgan and Goldman Sachs representatives declined to comment. Officials at Merrill Lynch and RBS couldn’t immediately be reached for comment. The Financial Services Authority in London and the European Commissions antitrust department in Brussels declined to comment on whether European authorities are investigating pricing in the CDS market, according to officials at the agencies.
Owners and Providers
Justice Department investigators want to know if Markit’s bank shareholders received advantages as owners and providers of prices and trading patterns for credit-default swaps,aid two of the people. The data from the market’s largest users is provided to more than 300 financial firms to set prices of the contracts in their portfolios, according to Markit’s Web site.
The notices ask recipients to give the Justice Department details on the amount of their trading, how much they have at risk in the market, the monthly value of their credit swaps and other information, said a person who read parts of the letter to Bloomberg News.
The letter also seeks the level of current bank ownership in Markit and whether the shareholders have tried to sell their stakes, the person said.
End-of-day and real-time prices for credit swaps are available to Markit customers, the company says on its Web site. Real-time prices come from the Wall Street dealers that send that information to clients throughout the day.
Markit checks the information it receives to ensure it’s current and correct, according to the company. “By insisting on the highest standards, we ensure superior data quality for an accurate mark-to-market and market surveillance,” the Web site says.
“Markit strives to enhance transparency and efficiency in the credit derivatives market by making all our independent data products commercially available to all market participants,” company spokeswoman Chick said in the statement.
Markit, founded in 2001 by Toronto-Dominion Bank executives Uggla and Kevin Gould, made acquisitions in 2007 and 2008. The company purchased the owners of the iTraxx and CDX credit- default swap indexes, which are used to speculate on the credit quality of more than 500 companies in Europe, Asia and North America.
Losses on mortgages made to borrowers with poor credit began to soar in 2007, causing credit markets to freeze up and leading to almost $1.5 trillion in writedowns and credit losses at the world’s biggest financial institutions, according to data compiled by Bloomberg.
Goldman Sachs today reported record earnings of $3.44 billion in the second quarter that beat analysts’ estimates as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.
The record results were driven in large part by trading unregulated over-the-counter derivatives. Revenue from fixed-income, currencies and commodities, the company’s biggest unit, was a record $6.8 billion, compared with $6.56 billion in the first quarter and $2.38 billion in last year’s second quarter.
Bet you didn’t know Markit is owned by JPMorgan, Bank of America, and Goldman Sachs, did you? To be honest, I did not until I read this article, but I am anything but shocked to learn they own the company that “reports” the prices of derivatives which they own and have worked so hard to hide and obscure!
And you know who Markit is right? Markit Homepage…
They are the ones whose little graphs I present on occasion as they are the ones reporting on pricing of the CMBX (commercial real estate securities) indices:
Ironic that when you click on the Markit icon on their site, it takes you to a page with a big heading titled “Credit Fixings,” LOL!
And what is it exactly that they are “fixing?” Why PRICES of course!
The Credit Event Fixings are designed to ensure a fair, efficient and transparent process for settlement of credit derivative trades following a corporate default. The Fixings were developed by Creditex and Markit in close cooperation with ISDA and major credit derivatives dealers and are an integral part of ISDA's CDS Index protocols. Creditex and Markit have jointly acted as administrators of the Credit Event Fixings since their inception in June 2005.
There are simply no checks and balances on our financial industry at all. They pay for their own ratings. They own and control the companies who report the value of their “assets.” They own the politicians and make the rules. I won’t hold my breath on the Justice Department taking real and meaningful action. I fully expect a good show and a little talk. But breaking up the cartel – forget it, it’ll never happen. Guess who’ll own the exchanges?
Supertramp – Crime of the Century: