 Hey guys, it's MJ the students actually and in this video, we're going to be talking about Blackstone, which is a pretty large Acid management fund. They've got something like 55 billion dollars under management. So very big very big What we're going to be seeing in this video is they're using an instrument known as a credit default swap and they are Manipulating the market with it Now look, I do want to just throw out a little quick disclaimer And that is that this video's primary primary primary purpose is for education and This story is a lot more complicated There's a lot more to it and I do encourage you guys to do your own research around it This is almost like an introduction to the problem and I may have simplified something So just giving you that little disclaimer but I'll try to capture the essence of what these guys are doing but before we can get into it We need to look at what is a CDS a credit default swap and if you guys have been a long time subscriber on my channel, you'll know that I hate these things these things I think are absolute rubbish and I've made some videos on why they're so bad But in essence why I'm so against them is they are essentially their insurance products, but they are packaged as financial instruments so as to bypass regulation and I think it's because of that they were starting to see the market manipulation occurring so how a credit default swap works is You can have let's say person a and they can make a loan to person B Okay, credit default swap says that person C Can make a deal with person D. So they don't have to be the same people even and they say And how this so this will be the loan And this will be the CDS. The loan is simply a gives to be And in the future B gives back To a very very simple. That's I think we're all happy with what a loan is a CDS says C will pay D if a Doesn't pay B. Okay. Now a and D could be the same person Okay, but I've put them as separate because this is where credit default swaps get a little bit out of hand is you can Stop making bets on other people's failure. So you're taking an insurance product and you're turning it into a speculative instrument The reason why I said is that credit default swaps was essentially saying that I've given money to be okay. I'm worried that B might not be able to repay So I'm prepared to take a little bit of the interest that I would have got and pay it to an insurance person and saying you keep a little bit of this money and Only if B fails to repay me you'll cover my costs and that that's quite a nice thing It's a quite a nice way to hedge Your credit risk Okay But when you take it and you don't have that loan out It goes from being a hedging instrument to something known as a speculation instrument And this is where blackstone gets involved Blackstone comes along. Let's maybe change the color. What's a good color for for blackstone? I know this dark gray So, yeah, we have we have blackstone being person number D. Okay So here comes blackstone and they're gonna buy a credit default swap from and can be from any third-party person Okay so we have here a third party person and They're gonna buy credit default swaps on a company that is kind of struggling. Okay, so we have a struggling company struggling company and This struggling company is a company that has taken loans from various lenders Okay So we have lenders a struggling company a third party writing up these credit default swaps and Blackstone and this this sometimes happens in the market. We have these four different parties all based around This instrument known as a credit default swap. I'm just going to write it out here is that If if be so the struggling company repays Okay, then we will have certain winners and we'll have certain losers Okay, the winners if the struggling company repays is going to be the lenders because they're getting their money back Plus interest and it's going to be the third party that wrote up the credit default swap because they're getting to keep the premium And they don't have to repay the amount. So the losers is They're gonna be Blackstone Okay, now if be fails to repay We're gonna see the opposite. Okay, the winners are going to be Blackstone and The losers are going to be the lenders because they're not getting repaid their loan the third party has to repay Blackstone because the credit default swap and the struggling company is A bit of a loser as well because all their companies gone bankrupt. So I guess a Winner here. We could also say is the struggling company in the sense that they get to stay afloat And this is where Blackstone comes in and they're very very sneaky. So let's get a let's get a different color Let's get this bright pink What Blackstone does is they say hey, mr. Struggling Company Let's go for lunch at that really fancy restaurant, you know, just across from Central Park, you know so they'll come to the struggling company and They're going to manipulate them. So how does this manipulation work? Okay They're gonna say to the struggling company The loans that you have with the lender. So this loan over here You're paying quite a high interest rate. Let's say it's 10 percent we can give you an even bigger loan at a lower interest rate and The struggling company is like wow Blackstone. That's that's so nice of you You're giving me a loan at a lower interest rate. This is gonna help my company This is gonna make sure I'm even more successful. Wow You're so you're such a nice person and and you've got a credit default swap on me. So well, you know This is this is amazing. You're being so nice to me and Blackstone is like well look here I'm I'm doing this as a as a gift as a favor and In return, I need a little favor myself and the struggling company is like wow Anything for you Blackstone anything, you know, you're giving me this big loan lower interest rates You're helping my company. What can we do for you? And Blackstone says well, there's a condition. Okay We will only give this to you if you trigger a default on your other loan and the companies are what you mean They're like we want you to miss a payment. That's all you have to do is simply miss one payment of that loan and You can get this at a better rate so now what happens is We've shifted the struggling company from being a winner To a loser here and from a loser here to a winner here because if the struggling company defaults They're gonna get another loan at a lower rate of interest Okay, and what that means is that your struggling company now goes and defaults because it's now in their interest to default and because they've defaulted Blackstone is going to win and the losers are going to be your lenders and your third party and Why this is very dodgy is because Blackstone is Manipulating a company that it should not be manipulating at all And this is where we're seeing a big problem because now Blackstone is not just doing it to one company they're doing it to a whole bunch of other companies and They are absolutely coining it in these credit default swaps. So credit default swap could be selling like this Create default swap. You pay a hundred thousand dollars Okay, if they're if they make their payment back you get nothing back, but if there is a default The payment could be selling like one million You know, you can see it's it's a like a much bigger payment than what the amount of money you put down Now with Blackstone having 35 billion They can use this money to go and offer loans at very low interest rates So they lose money technically on the interest that they're receiving from the struggling company But they absolutely coin it on the credit default swaps and the best part is That since I read so I read an article in the Economist magazine that can't outland it outland this whole thing the security exchange commission So far and maybe need just go double check this because the article I read was I think a few days old the security exchange commission Has done nothing. They've turned a bit of a blind eye and these guys here are really really upset and It's really weird how the security exchange commission is Turning a blind eye to complete market manipulation yet They're the same people who are like, oh, no Bitcoin Bitcoin and various ICOs You know that are like a couple of million like to say 10 million need to be regulated But something that is going on in the billions of dollars gets completely ignored So, yeah, that is basically The video I just wanted to point it out to you guys another reason why credit default swaps suck Like I say, I do have another video where I rent and rave about there for a much longer period of time But it is sad to see that in the market big players can manipulate the game and make themselves even bigger And that's why it's so important that when you study to become an actuary you do these courses known as Ethics which might say, you know what just because something might not technically be illegal If it's a if it's a dodgy thing to do probably don't do it But anyway, that's a topic for another day. I hope you guys enjoyed this video And please feel free to leave any comments or suggestions in the comment section below. Yes