Discredit derivatives

A class of derivatives invented by pioneering derivatives guru and amateur crime novelist Hunter Barkley to allow alternative investment funds, who had in prior years, lazily committed to environmental, social, and corporate governance standards in their portfolios as a cheap way of wowing virtue-signalling investors, not realising that anyone would really object to massively profitable leveraged investments in firearms, narcotics and financial weapons of mass destruction, much less that the dear old European Commission would then get in on the act and hold hedge funds to account for false advertising if they did.

The Jolly Contrarian’s Glossary The snippy guide to financial services lingo.™ →Go uptown It’s the Real Thing. Index — Click the ᐅ to expand: Glossary Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Barkley’s idea was simple: if it was okay to extract the crappy credit profile from a portfolio of mortgages off and lay that off on someone with sufficiently deep market expertise and advanced risk management techniques to bear it, why not do the same thing with the unwanted igmony that comes with profiting from outrageous investments?

Barkley began to market instruments — at first, simple put options — laying off the shame on those who could most easily bear it; namely — and this was Barkley’s real genius — the very badly-run, environment-wrecking corporates that were polluting these poor hedge fund portfolio in the first place. The hedge fund would write an at-the-money stigma put to, for example, the Golden Crown Palm Oil Company of Sudan Pty Ltd (after all, really, what did they care?), thus getting rid of fund’s disgrace for investing in that very company.

Objections came soon enough that this was obviously circular, but Barkley swiftly pointed out that, well, so too was debt value adjustment hedging, and everyone seemed cool with that for a good few yeards, didn’t they? Indeed, it kept a phalanx of financial institutions out of technical insolvency — and their DVA traders handsomely remunerated — for a good three or four years after the worst excesses of the credit crunch. Slowly the product began to catch fire. “Soon it was blazing like the Amazon jungle!” Barkley fondly remembers, when asked about it at his mansion in Puget Sound today.

Eventually, though, people started to bridle — I mean, could the Golden Crown Palm Oil Company of Sudan Pty Ltd really take its own discredit back, and thereby exonerate the denizens of Mayfair of their ESG obligations? — Barkley refined the offering by combining it with another of his innovations: cross-political currency “turpitude swaps” where, for example, a natural wilderness gas fracking conglomerate could swap its embarrassment at precipitating a series of minor earthquakes on the local Inuit people with pornographic film distributor's regret for generating artificial losses to gain tax relief for its celebrity investors. Now Hackthorn Capital Advisors Master Fund III LLP could lay off its porno-tax discredit to Golden Crown — a palm oil producer, so not implicated in onanistic or fiscal wrongdoing — who in turn swapped it out with Antwerp Fruity Motion Pictures B.V. in return for its own environmental embarrastment risk, which Antwerp had aquired when selling a put from another hedge fund in the same pickle as Hackthorne Advisors.

Thus creating a so-called “Discredit Default Swaps” were born.

See also

• ESG
• Credibility derivatives
• Turpitude
• Hunter Barkley
• CDO squared