Specifically, she looks at the role of BNP Paribas and one of its employees. The employee sits on the committee that decides if the Greek debt restructuring is a 'default' that triggers payments to the buyers of credit default swaps.
She identifies several conflicts of interest including:
- BNP Paribas known exposure to Greece;
- BNP Paribas unknown exposure in terms of credit default swaps; and
- BNP Paribas compensation for maximizing the amount of the outstanding bonds that are restructured.
AS the debt mess in Europe deepens, bankers are pressing Greece’s bond holders to swallow big losses.
Leading the charge is BNP Paribas, the big French bank, which has been hired by the Greek government to help persuade investors to accept a deal that would cut the value of their investments in half.
On paper, this restructuring would be voluntary. Bond holders would exchange their old Greek bonds, at a 50 percent loss, for new ones that would mature in 30 years. Painful, yes. But in theory, such a move would help Greece get a handle on its debt, and that would be good for everyone.
Behind the scenes, however, BNP officials seem to be twisting some arms. A big point of contention is — surprise! — derivatives.
Investors who own Greek debt and have bought insurance on it, in the form of credit default swaps, wonder why they should accept the offer that’s on the table. If Greece stops paying after the restructuring, those swaps are supposed to cover their losses, much the way homeowners’ insurance would cover a fire...
BNP and its client, Greece, want to corral as many investors as they can. The more bond holders they persuade, the more that Greece would benefit — and the more the bank would collect in fees.
So it is perhaps unsurprising that some recent meetings have taken on a forceful tone, according to three portfolio managers who attended three different sessions with BNP Paribas. The investors spoke on condition of anonymity because they feared retaliation by the bank.
Contrary to what the I.S.D.A. says, the BNP Paribas bankers have been telling bond holders that their credit insurance may not pay off down the road, because after the restructuring is completed, the terms of the old debt might be changed, these money managers said....
But the warnings from BNP Paribas carried weight, the money managers said, because of one of the officials who was making them. She is Belle Yang, a BNP specialist who also happens to serve on a powerful I.S.D.A. committee. The panel, the “determinations committee” for Europe, decides what constitutes a “credit event” in Greece or elsewhere on the Continent.
This is the committee that will likely rule that the Greek deal would not constitute a default. That is because the restructuring would be “voluntary.” Some investors who were counting on their credit insurance would be out of luck.
In the meetings, the investors said, Ms. Yang identified herself as a member of the committee. That itself was unusual, because the names of I.S.D.A. committee members are normally kept confidential. The association doesn’t disclose them, and lists only panel members’ employers — 15 large global banks and financial services firms. Those institutions include Bank of America, BNP Paribas, Goldman Sachs, BlackRock and Pimco.
One of the money managers who attended the meetings said Ms. Yang’s presence seemed to raise a conflict. Ms. Yang works for BNP, which stands to profit from the restructuring. She is also on the I.S.D.A. panel, which will determine if credit default swaps pay off.
One of the money managers said he pointed out Ms. Yang’s dual role at a meeting.
“You’re on the determinations committee, your firm is earning a big fee and trying to scare me into tendering my bonds,” he said he told her. He said Ms. Yang replied: “No, I’m just trying to help tell you what could go wrong.”...
The money managers with whom I spoke said BNP Paribas seemed to be motivated either by its desire to generate fees from the exchange or, perhaps, by worries about its own exposure to Greece. They wondered, for instance, if BNP Paribas has written a lot of insurance on Greek debt. If so, getting people to unwind such swaps now would be less costly for BNP than having the insurance pay off.
If investors think debt terms can be changed by fiat, they will flee the market. Ditto if they find that their insurance can be made worthless. Indeed, some of the volatility in European debt recently may be attributed to investor fears about these issues.
The discussions with BNP Paribas confirm the view of some investors that credit default swaps are not insurance at all, but rather instruments that big banks use to benefit themselves. The secrecy of who serves on I.S.D.A. committees feeds this fear, as does the fact that these panels are both judge and jury.
“Market forces like to think of market pricing as having symmetry,” said David Kotok, founder of Cumberland Advisors, a money management firm in Sarasota, Fla. “But a system which requires decisions by parties who have vested interests on one side is asymmetric. A surprise rule change or an interpretation which was understood by some and misunderstood by others also defeats symmetry. In the case of credit default swaps, both elements apply.”