I have never watched Jon Stewart’s show, or any other program on Comedy Central. Life is too short. But I am aware that some people take Stewart seriously as a political commentator. In fact, the New York Times described him as perhaps “the most trusted man in America.” But why? I assume that Stewart is slightly above average in intelligence, but does he have any experience, knowledge or expertise that would qualify him to pontificate on matters economic or political? To my knowledge, no. Nevertheless, he is something of an idol on the political Left.
Whether he deserves to be is another matter, as Felix Salmon argues with devastating effect. Let’s start with Stewart’s Comedy Central program: he purported to analyze a complicated financial transaction involving the Blackstone Group, a private equity and investment banking firm, and Codere SA, a Spanish company that operates betting parlors, online gambling sites and other gaming activities. The transaction was, as I said, complex, and it is obvious that Jon Stewart didn’t begin to understand it. But that didn’t prevent Stewart, who may or may not be funny but is certainly arrogant, from opining that what Blackstone did “should be illegal.” Salmon begins by noting that Stewart’s harsh assessment was based entirely on a single Bloomberg News story:
[A]ll concerned — Bloomberg View, the Daily Show, Fortune — take at face value the core assertion made by Bloomberg News: that Blackstone made a profit of “from 11.4 million euros to as much as 13.7 million” on its Codere trade.
The article attributes those numbers simply to “data compiled by Bloomberg”, but in fact it’s quite easy to see where they came from. Blackstone, according to Bloomberg, “held 25 million to 30 million euros” of credit default swaps on Codere. It then forced Codere into a technical default (repaying a loan two days late) — which triggered those swaps and forced a payout at 45.5 cents on the dollar. Therefore, the amount that Blackstone received on its CDS position was somewhere between €11.375 million and €13.65 million.
But that number is gross revenue, not profit. The profit on Blackstone’s CDS position can be looked at as being the difference between that payout, on the one hand, and the amount that it spent buying the CDS in the first place, on the other. (Although in fact, as we’ll see, it’s more complicated than that.) Unless we have some idea of Blackstone’s cost basis on this trade, we have no idea what its profit was. Bloomberg, however, seems to simply assume that Blackstone’s cost basis for the CDS was zero — that it managed to accumulate all that insurance without paying anything for it whatsoever.
To be sure, Blackstone are smart operators, and I don’t doubt that they’re making a profit on this trade. But we really have no idea how big that profit was.
Does Jon Stewart understand that there is a fundamental difference between gross revenue and profit? Perhaps not. His only known skill is comedy.
And in any case the whole thing was part of a much bigger trade, which has yet to be unwound. Primack explains that “in the first half of 2013, Blackstone affiliate GSO Capital Partners purchased debt and credit default swaps in Codere” — in other words, it entered into a basis trade, where it bought debt in a troubled company and also bought insurance on that debt. But Codere was already a deeply troubled company in the first half of 2013, which means that Blackstone would have had to pay some nontrivial amount of money to buy its CDS position in the first place.
So before we take Levine’s lead and admire the “majestic beauty” of the Blackstone deal, let’s wait and see just how profitable it was. We’re not going to know that for a while, since Blackstone is now a major creditor of Codere, which is (still) at very high risk of defaulting on its debt: when the original Bloomberg article was published in October, Codere’s bonds were trading at a mere 53 cents on the dollar.
The way that Blackstone made some unknown amount of money on the CDS leg of its trade, then, was to take a huge direct exposure to Codere on the other side of its trade. It’s still entirely plausible that Blackstone’s current exposure to Codere could be written down sharply, and could even end up being bigger than the profits on its CDS trade.
Two other points are worth making, here. The first is, as Primack points out, that absent new money from Blackstone, Codere was pretty certain to default in any event. As a result, Blackstone can credibly be painted as the white knight here — as the company which managed to find a way to funnel money from the CDS market back into Codere, thereby avoiding a bankruptcy filing. That’s certainly Blackstone’s view: spokesman Pete Rose says that the trade saved jobs at Codere, as well as lots of money for Codere’s supplier-creditors.
What’s more, it’s worth stopping to ask who Blackstone bought the CDS from, in the first place. Not many people are in the business of writing single-name CDS on a troubled company like Codere, and the people who do engage in such transactions tend to be highly sophisticated investors — and indeed are probably engaging in some kind of relative-value trade of their own.
Add it all up, and I really don’t think that what Blackstone did was particularly egregious; there’s certainly no reason to believe that it should be illegal. The Daily Show basically accuses Blackstone of setting fire to Codere so that it could collect the insurance proceeds — but in fact Blackstone’s actions were a large part of the reason why Codere managed to survive. Far from being a pile of ashes, Codere now has a real chance of avoiding liquidation. For a piece of clever financial engineering, that’s an uncommonly positive societal outcome.
I trust that you were able to follow that. Is there any chance that Jon Stewart had any inkling of the real economics behind Blackstone’s investment in Codere? No. He simply isn’t smart or knowledgeable enough. In that respect, he is reminiscent of Barack Obama: quick to issue condemnations of business transactions that he is not experienced enough to understand. Here is the Stewart segment on Blackstone and Codere:
So why, exactly, should anyone get his news from a comedian?
UPDATE: In the comments, Kurtis Fechtmeyer, whose knowledge of finance exceeds Stewart’s–and, I am afraid, Barack Obama’s–by several orders of magnitude, adds:
Of course, the most obvious point is: who does Blackstone work for and where does that profit go?
Well … funny you should ask. Unlike the regulated banks that increasingly play arbitrage games based on their balance sheets which are shored up by the Federal Reserve, private equity firms return their gains to their clients less a modest “carried interest” on the profit they make.
And who are their investors? University endowments, state pension funds, PC&L insurers, and family offices. In other words, thanks to Blackstone’s good work, YOU don’t have to pay as much in taxes to support retired teachers, policemen and firefighters and thousands of minority kids who get scholarships to top universities.
If Jon Stewart’s low information audience had any clue what a pseudo-intellectual like Stewart was actually talking about, they wouldn’t be laughing so much.
PAUL ADDS: At his 2010 rally in Washington D.C., at which he attempted to speak seriously, Stewart proved to be vacuous when it comes to political commentary. I wrote about his hack remarks here.