Streams

Did Anyone Make Money on the Debt Ceiling Nightmare?

Thursday, August 04, 2011

Is the Pope Catholic? While no one is gloating publicly, there are plenty of ways that a resourceful trader could have made millions as the country barreled towards the financial cliff of not raising the debt ceiling.

“I don’t know any specific identities of any person any institution that made out well, but I’m sure there are because there are plenty of ways that someone or some institution could make out well,” said New York University Stern School of Business professor Lawrence J. White.

Amidst the nausea of uncertainty, traders could have made money betting on the market falling (selling short), as stocks fell in the week leading up to the final agreement.

Another way could have been through selling credit default swaps — basically insurance policies against a loan default. CDS are risky because they are highly leveraged and highly speculative, but there is the potential to make a large wad of cash.

If Congress didn’t come up with an agreement and the federal government default on its debt, traders and institutions would have had to pay the insurance.  But since that didn’t happen, those who sold CDS to unlucky gamblers are probably hearing the cha-ching of the register. For the most part, it’s only big, institutional players who buy and sell on the CDS market, not your average Joe.

Other ways brokers could have made money over the last few weeks: shorting U.S. government bonds.  Another is buying "inverse Treasury ETFs," which are designed to go up if the U.S. treasury bonds go down. On July 29, when things looked really bad for a deal, and once again on August 2, TYO, — one of the inverse Treasury ETFs — showed more than double the amount of normal trading volume

Market timing is not an easy game to play, but “with a significant drop in the market, anybody who shorted would have made a ton of money,” said Jim Angel, associate professor of finance at the McDonough School of Business at Georgetown University.

Obviously, this hasn’t been a great week on Wall Street — the Dow Jones tanked on Tuesday when President Obama signed the debt ceiling extension bill, and it continues to fall — but professor White and other economists attribute the poor showing to the weak U.S. economy and uncertainty about Europe’s financial solvency and not the debt crisis.

“We didn’t jump off the cliff, we avoided that particular potential disaster but there are other not so pleasant things going on in the environment,” White said.

And even then, clearly some people are cashing in.

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Comments [1]

Just a zero sum game...For every winner there's a loser. (with a couple bucks scraped off by your brokerage house)

Our greatest minds need to go to work creating surplus wealth and not just trading it around. Maybe then we can begin to resurrect the buying power of the middle class.

Aug. 05 2011 12:37 AM

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