Armageddon Trade Betting

Christopher Santarelli

In the first trading day following S&P’s announcement that the U.S. government credit rating would go from Triple-A down to AA+, U.S. stocks have sharply declined and investors are scrambling to rid themselves of risky assets. With Wall Street in disarray, one investor is smiling after having walked away from the crisis nearly a billion dollars richer. ETF Daily News reports that the investor bet on the downgrade, and is now heavily benefiting from it:

“Someone dropped a bomb on the bond market Thursday – a $1 billion Armageddon trade betting the United States will lose its AAA credit rating. In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world. The massive trade wasn’t placed in bonds themselves; it was placed in the futures market. The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.”

Jack Barnes of Money Morning suggests hedge fund manager John Paulson, Bill Gross’s PIMCO, or U.S. and Chinese central banks could be the betters, as they are some of only a few shops or central banks that could even take on such a level of market risk. Barnes notes that Paulson made about $6 billion on a similar trade not too long ago when he bet against subprime mortgages, the investments that helped bring down Lehman Brothers in 2008.

That seems plausible. But there is one more possibility. At least one outlet is suggesting that liberal financier and billionaire investor George Soros could be the one. Daily Mail reports:

“There are mounting rumours that investor George Soros, 80, famously known as ‘the man who broke the Bank of England’, could be involved.

He made more than $1billion on currency speculation when the British pound left the Exchange Rate Mechanism on Black Wednesday in 1992.

The latest bet was made on July 21 on trades of 5,370 ten-year Treasury futures and 3,100 Treasury bond futures, reported ETF Daily News.

Now the investor’s gamble seems to have paid off after Standard and Poor’s issued a credit rating downgrade from AAA to AA+ last Friday.

Whoever it is stands to earn a 1,000 per cent return on their money, with the expectation that interest rates will be going up after the downgrade.”

The deal was made around the same time Soros dissolved the non-family aspect of his hedge fund, returning money to outside investors while freeing his fund from adhering to SEC reporting mandates. Barnes asserted in July that whoever made the deal must have been a major proprietary trader who had an ear to someone first aware of when a debt-cieling deal was made between major leaders in Washington. Kenneth Schortgen connects the dots to Soros’s possible involvement:

“While the identity of the ‘mystery investor’ remains unknown, many indicators do point to George Soros as the principal benefactor.  First, Soros has been tied to the Obama administration since the 2008 elections.  In February of this year in fact, a Soros investment fund profited well on President Obama’s new green energy policies. Secondly, right about the exact same time as the $1 Billion bet took place on the US credit rating downgrade, Soros made public the move to divest his management fund of outside investors, and quietly go private.  This move allows him to make trades and investments without being required to notify the SEC under the new Dodd-Frank act passed in Congress last year.

Of course, this mystery bet could have been made by any Hedge Fund that followed Soro’s course of action, and went private on their own.  However, very few people have the inside contacts with the Treasury Department and Obama administration that Soros does, and the historical evidence does point strongly to this bet being one that he has done in the past.”

In 1992 Soros nearly destroyed the British Pound, and made a profit of $1 Billion, by betting against the currency and borrowing sterling heavily, converting that into a mixture of Deutschmarks and French francs. On “Black Wednesday,” Soros’s bet paid off, and he has since been called the man “who broke the Bank of England.” Many see “eerie similarities” between the breaking of the Bank of England, and the investor who made big when betting on the first S & P downgrade to U.S. credit in the agency’s history.

Time will tell if the mystery investor, and his or her high-level Washington insider, will be revealed.