Russian President Putin is angling to take over Ukraine. Image credit: Creative Commons

What if Vladimir Putin’s protracted, blowing-hot-and-cold deployment of the Russian military to wartime footing against Ukraine has been motivated by other than geopolitical motive? What if Putin has been fiddling financial markets?

The question occurred to me when I read David P. Goldman’s fascinating Asia Times story about the effects on markets of Ukraine Prime Minister Volodymyr Zelensky’s Monday remark that Russia would attack in two days. A top aide to Zelensky quickly brushed off the prediction as a joke. (The prime minister is a former television comedian.) But that dismissal didn’t keep the news from punishing Russia’s sovereign debt. As Goldman wrote:

A key political risk gauge, the cost of US-dollar-denominated insurance against default on Russia’s sovereign bonds spiked to 2.75 percentage points above the interbank rate early February 14 before settling back to 2.5 percentage points. That’s close to the high point during the peak of the Covid-19 market panic in March 2020, with the difference that the credit default swap market reflected fear of sanctions against the Russian Federation rather than economic distress.

I couldn’t help thinking of a premise of my 2017 financial thriller Nuclear Blues. Reporter Joe Hammond, while on a sightseeing tour in North Korea, is killed by northern guards after inexplicably bolting and running across the border into the southern half of the Demilitarized Zone. His photographer-musician pal Heck Davis focuses on a clue that suggests Joe may have been pursuing a big financial story.

Heck seeks expert advice. What he finds (what I found in researching the novel) is that it would not be impossible for a national leader to use military provocations to move CDS prices. The much harder – but not totally impossible – part would be finding bankers to abet the scheme and harvest the profits.

I pose the question only half-tongue-in-cheek. Assuming you don’t feel certain already that you know what the Russian leader is up to in and around Ukraine, mentally substitute Putin for Kim Jong Un – and then see what you think. The following passage, with Heck narrating, is edited slightly for length:

In Hong Kong

An elevator door slid open and I got on. A TV monitor showed a financial network anchor interviewing someone. Glancing at the interviewee I recognized the tinted aviator glasses and thin-lipped smile of Helmut Fassler, the German head of the Hong Kong office of a London-based financial research.

Before the elevator door opened onto the lobby, I caught a snippet of what Helmut said: “In response to the accounting scandal, all the major red chip oil companies’ CDS spreads have widened this morning.”

Within an hour I was sitting in Helmut’s Victoria Peak apartment. He seemed glad to see me. “I watched you on TV at the DMZ when Joe died. I had a lunch appointment, but you sounded so urgent on the phone I postponed it.”

The view from Victoria Peak. The first island is Hong Kong island; the other island in the background is Kowloon. Image credit: Creative Commons

“Much appreciated, Helmut. I’m trying to figure out why Joe imagined foreign investors would be interested in North Korea. How could anybody make money out of a country that sees farmers’ markets as the sinister leading edge of capitalism.”

“You have a point. North Korea has no stock exchange, no bond market. Did Joe leave any clues to what he might have been after?”

“Not many. He did write on his hand, in ink, the letters C, D and S…. Financial illiterate that I am, I did know about certificates of deposit. I worked on that angle and didn’t get anywhere. Then when I was coming out of the Goldberg Stanton office I saw you for just a second or two on TV talking about something called CDS, all the letters pronounced separately. That could have been what Joe wrote on his palm. The S was smaller than the D, but the D was also smaller than the C, so it could have been sort of a wedge-shaped scrawl of an all-capital-letters term.”

I wrote it on a page of my notebook and showed him. “Problem is, I have no idea what it might refer to. That’s why I’m here.”

 “I don’t suppose you know the term credit default swap.”


“Not many do. These things weren’t invented until 1994, didn’t catch on until around 2003 and are still the province of financial specialists.”

His phone rang. He glanced at it and shut off the ring. “My lunch date grows impatient, as beautiful women are inclined to do. Let me give you a simple explanation. Let’s say you own Ford Motor bonds – you’re lending Ford money in exchange for its documented promise to pay back the principal on a given date along with interest at the stated percentage.”


“You’ve been hearing bad things about Ford and worry that Ford will default on those bonds. You consider selling, but others have the same concern, so the bond’s price has dropped.”


“But on the other hand, the value of your bonds could soar. Rumor has it that Ford is close to a breakthrough on the alternative fuel front and the company might prosper.”

Helmut’s household servant, a middle-aged Chinese man, entered the spacious room, whose panoramic wraparound view looked as expensive as the one from Goldberg Stanton’s office. “Your lunch appointment has been trying to reach you. She says meet her at Ritz-Carlton Lounge & Bar instead of Amber in Mandarin Oriental. She likes Ritz-Carlton pinky drinks better.”

Helmut nodded agreement and turned back to me. “Because Ford might pull through, you’re inclined to hang onto your bonds and buy more at bargain-basement prices. But in case Ford fails, you buy a credit default swap to protect the bonds. The issuer promises that if Ford defaults within five years you can surrender the bonds and be paid their face value.”

“So a CDS is a way to hedge my bet, an insurance policy with a fancy name?”

“Something like that.”

“And the cost?”

“You pay an initial price for the CDS and an annual fee based on a percentage of the bond’s current market value.”

“To a high roller, wouldn’t insurance seem like a dowdy, middle-aged, conservative, not-likely-to-make-him-a-billionaire-in-a-hurry kind of thing?”

“No. There are important differences between a CDS and an insurance policy. For one thing, the CDS issuer usually isn’t an insurance company; most are banks.”


“And the bigger difference is that you can buy a CDS on something you don’t own. A CDS on a particular bond can be bought and sold over and over with none of the buyers and sellers ever owning the bond itself. The numbers of swaps may total many times more than would be necessary to insure bondholders against loss.”

“I don’t see how that make sense.”

“It makes infinite sense in the world of high finance. Let’s change the scenario. You don’t own any Ford bonds. The market consensus is that the future of Ford looks rosy because everyone knows Ford is on the verge of a breakthrough on the alternative fuel front. But you hear a rumor that the company is in such deep financial trouble no new car model will overcome its problems and Ford will likely default on its bonds. For a certain price you buy a ‘naked’ CDS. The negative rumor spreads and the CDS price goes up. You sell yours for a profit.”

“Where I come from they’d call that flat-out speculation.”

“They would be correct. Naked swaps leave more room for speculation than stocks, bonds or currencies. And speculation is mostly what it’s all about. The CDS is a type of derivative – like futures. CDS traders can be compared to guys who have never seen a live pig but specialize in sitting in front of computer terminals, buying and selling contracts for future delivery of pork bellies.”

“Was it Warren Buffett who said derivatives are ‘financial weapons of mass destruction’?”

Helmut sipped at his tea. “He also called them ‘time bombs.’ With the onset of the credit crisis quite a few critics were agreeing with him.”

“Oh, yeah. There were a lot of losers when that hit. I saw The Big Short. Great movie.”

“Some big winners, too, like John Paulson, who foresaw that sub-prime mortgages would turn out to be toxic.”

“It shouldn’t take a psychic to predict selling a house to someone who can’t afford it isn’t going to work out.”

Image source: Wikipedia

“True enough, but Paulson also had the vision to persuade Wall Street to package those mortgages and sell them to others. That way, the banks could write credit default swaps insuring against default. Then Paulson went on a CDS buying spree, betting that the people buying the mortgage debt were suckers.”

“The bastard must’ve hit the jackpot when the crash came.”

“He made billions.”

“And others are still cashing in big time?”

“Credit default swaps have been going out of fashion, but the market is still enormous. The total amount of credit protection at risk in case of default is counted in fourteen figures. The amount invested in the swaps themselves – the ‘premiums’ – is smaller but still in the trillions of dollars.”

I stopped myself from remarking that Leadbelly’s Twenty-Five Cent Dude would be way above his pay grade messing with that stuff.

Helmut glanced at his watch. “It’s time for me to leave. Why don’t you come along and have lunch with us?”

“All right, thanks.”

As we were leaving, Helmut’s house man returned. “Your lunch engagement has canceled. She became tired of waiting.”

“Sorry, Helmut.”

“Don’t worry about it, Heck. There’s an amusing spot we can go to instead.”

At Boon Doc’s

We exited the taxi in Wanchai’s red-light district and headed down a stairway that discreet lettering on an arched overhead sign identified as Soi Awol. At the basement level, a small sign on a solid metal door told us we had arrived at Boon Doc’s 2050 Club. After Helmut held his microchip membership card up to the peephole for inspection, a hostess in skin-tight dress with deep cleavage unlocked the door and exulted, “Oh, Doctor Fassler, we so happy you come back.” Wiggling her ass and jiggling her tits, she ushered us to a table, cooing, “You handsome man, me so horny.”

Sober as I was, I recognized right away that she was a manufactured creation. But the quality was so impressive that, if I’d had more than a few, I might not have caught on immediately.

Once she’d seated us in a vinyl booth, with a ceiling fan sending a breeze our way and additional babes headed toward us, Helmut gave me a fill on the setup. “No humans work here. The Japanese were desperate to keep their lead in both robotics and love dolls. A joint venture brought the leading massage-chair designers in, as well, and they all worked long and hard developing secret proprietary techniques for mounting a love-doll body on a robot chassis. I bought a substantial stock holding last month, as soon as I learned about the breakthrough, and I’m recommending my adventurous clients do the same.”

Brushing away the lovely but programmed ladies, who kept calling us “butterfly” and promising to “love you long time,” I urged Helmut to return to our earlier topic: “You said there’s no North Korean bond market.”

“No. There are no true North Korean bonds. There’s a few billion dollars’ worth of outstanding debt and accumulated unpaid interest left over from Western bank loans to North Korea in the 1970s. They quickly defaulted and no one has been willing to lend to them since.”

“So I’m wondering if maybe the North Koreans have skipped ahead and there’s a North Korean CDS market that’s attracting speculators.”

“There aren’t any North Korean credit default swaps. No one would issue such a thing, because the North Koreans have already defaulted.”

“Pardon me if I’m not getting it, but why would Joe have thought about the CDS market in connection with North Korea?”

“I’ll show you when we get to my office.”

WCDS on the Bloomberg

Helmut’s office was packed with somewhat longer-in-the-tooth technological miracles than the ones we’d experienced in Boon Doc’s. He wheeled his chair around to face the four flat-screen monitors and keyboard of his Bloomberg data terminal, which took up the top of his rear desk.

Bloomberg terminal in the Bloomberg Terminal Museum. Image source: Wikipedia

“Although no North Korean CDS market exists, Joe was likely working under the assumption that what happens in North Korea affects financial markets in other countries.”

“Can you be more specific?”

“North Korea did a nuclear test early today and threatened Japan with nuclear destruction. Let’s look at the effect on Japan Airlines bonds.”

In the upper left-hand corner of one of the middle monitors he typed WCDS, the letters glowing orange. Seconds later a new screen came up. He tapped away some more. Finally, happy with the page that appeared, he turned and beckoned me to lean forward.

“OK, I called up the world CDS market by country, narrowed it down to Japan and then to this graph, which shows the price fluctuation of credit default swaps on JAL bonds.”

He pointed to a spike at the right end of the graph. “Here’s the result, which I talked about this morning at the beginning of my TV interview. I guess you tuned in too late to catch that. But look: The reported trading price of the CDS on JAL debt went up by almost fifty bips.”

“What’s a bip?”

“A basis point: one hundredth of one percentage point. Fifty basis points is one half of one percent – of the price of the bond, not the price of the CDS. That translates into a huge percentage increase in the price of the CDS.”

“So let me see if I analyze this right. The market thought the risk of a nuclear war against Japan increased. Therefore the risk that the flagship airline would default on its bonds increased. And so the CDS price went up?”

“You get the picture. And if we switched from JAL to some other Japanese corporate bonds you’d see movements in the graphs similar to what we saw here. There were large movements for South Korea as well, although not as large as those for Japan.”

“So could someone have made a pile?”

“Yep, if he guessed ahead of time that the test – and the threat – would happen right around now, so he could buy enough Japanese and South Korean swaps to make a killing. If he guessed – or if he …” Helmut gave me his cynical, conspiratorial grin.

“You mean if he had the skinny, from the fat guy who pushes the button, that the test was coming soon and that North Korea would threaten Japan explicitly – and, knowing what that would do to the Japanese and South Korean CDS markets, went out and bought himself a trainload of swaps?”

“Exactly: the ultimate insider trading.”

“Maybe Joe was really on to something and getting so close somebody was after him, so he had to make a run for it. That would be good news for Evelyn – speaking of insurance. But I wonder how I’m going to prove that much.”

“We can talk about that, but right now I’ve got to get back to work. Can we continue the conversation over drinks tonight?”

I went to the AsiaIntel office and briefed Langan Meyer. Lang agreed that this could be the angle Joe had gone after. He wanted to hear an expert think aloud about how we could nail down the story. When the cocktail hour approached we went together to meet Helmut.

In Kowloon

Holding forth in his favorite bar in Kowloon, Helmut began by reminiscing about Joe. A strikingly beautiful Russian hooker who was passing by the table spoke to Helmut. He stood and accompanied her to a corner to chat privately. When the blonde walked on and he sat down I remarked, “You’re obviously well known in this establishment.”

“She’s a regular in here who bugs me for investment advice whenever she sees me. She follows up with her broker. She’s been on a roll. That emerald ankle bracelet is new.”

“Speaking of advice, can we resume the finance lesson?”

“Where were we?”

“You follow the CDS market, I gather,” Lang said.

“I keep an eye on it, mainly for macro research purposes. Most CDS trades are still OTC ― over-the-counter – bilateral transactions.”

He turned to me. “We were talking earlier about how the insurance analogy is appealing but limited. There’s no one saying how much of a reserve you have to hold against the CDS contracts you’ve written, whereas in insurance you very much have to do that. For my clients, who tend to be conservative institutional investors, I normally stick to recommending less exotic, more closely regulated stuff.”

There was something I wanted him to expand on: “Earlier today you seemed to be telling me it’s easier to screw around with the CDS market than with other markets.”

“It’s far more conducive to insider trading than stocks, bonds or currencies. For one thing, it would be much harder to get caught – especially if you had enough lead time to put together your CDS positions carefully, over a period of days or weeks or even months, giving you more reason to hope no one would catch on to what was happening.”

Helmut told us that a sophisticated scammer would be placing trades on swaps keyed to as wide a variety of bond issuing entities as could be usefully fit into the overall scam. The scammer would not do the trading just in one place but would spread it out in London, New York, Singapore and Hong Kong. Given the fragmented nature of the CDS market, it would be very difficult to find a paper trail across multiple cities and counterparties.

Cover image Nuclear Blues by Gregory Pence. Coiurtesy Great Leader Books

“As if anyone were watching,” said Lang, looking disgusted.

“You have a point,” Helmut said to him. He turned back to me. “The markets in stocks, bonds and currencies are more or less tightly regulated in developed countries around the world. The prime regulatory agency, I’m sure you know, has been the US Securities and Exchange Commission, which does statistical analysis to look for clues that somebody’s cheating. There hasn’t been that sort of serious regulation of the CDS market.”

“So much for Buffett’s warnings,” I said.

“There was talk of banning naked swaps after the sub-prime mortgage crisis started in 2007, but Wall Street didn’t like that. The pro-banks juggernaut in Congress pushed the street’s argument that the CDS market is an efficient way to get early warning of a crisis that’s developing. They pointed out, for example, that bond rating agencies including Moody’s and Standard & Poor’s had lagged far behind the CDS market in detecting that Greek government debt needed to be downgraded drastically. There was something to that argument. I recall checking one day and finding that the Greek sovereign CDS was priced at almost 23 percent of the bond price.”

“Naked swaps are still OK, then?”

“The European Union since 2012 has forbidden naked swaps on the bonds issued by its member country governments. But corporate bonds aren’t affected. And in the US and the rest of the world you can still do naked swaps on either corporate or sovereign debt. A ban didn’t make it into the major US law signed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

Lang spoke up. “Dodd-Frank was supposed to clean up the financial system. No one seems to think the results so far are any better than mixed.”

“That’s a fair assessment,” Helmut replied. He explained that some credit was due to US regulators trying to use Dodd-Frank to clean up the markets. The Commodity Futures Trading Commission in Chicago had issued final rules that would apply to a variety of CDS involving indexing of multiple borrowers’ debt instruments. The SEC in Washington had been working on rules to require more reporting, more transparency, more use of clearing houses for the category of CDS that Joe probably was primarily interested in: the “single name” swaps covering debt of individual countries and companies.

“But the current administration in Washington is full of Wall Street veterans,” Helmut said, “and Congress is run by their sympathizers. Whether or not they gut Dodd-Frank, as they’ve threatened to do, it’s highly unlikely they’ll let tough new regulations go into effect. Even if they did, I doubt that we would see much resulting change. After all, the very nature of the CDS beast is insider trading. The lenders who issue and trade the swaps know far more of the intimate details about the credit worthiness of the debtors than any investor would likely know. Add the failure beyond the EU borders to ban naked swaps and I’d have to predict that credit default swaps will remain the Wild West of the financial markets.”

“You talk about more reporting and transparency,” I said. “But your Bloomberg terminal already seems to have an idea what’s going on.”

“It knows only up to a point. The banks that broker the trades haven’t been required to report much of anything. I showed you a graph. The truth is, nobody takes those numbers without a grain of salt. Individual brokers give their numbers voluntarily when the Bloomberg or Thomson-Reuters data people call and ask for current trading prices.”

With no mandatory clearing house exposure, Helmut explained, there was no guarantee the brokers polled would give the right numbers. “They may see it as in their interest to try to fool the rest of the market.”

“So you call up the graph but the numbers it’s based on are likely to be fake,” Lang said. “That I didn’t know.”

“A speculator can get a general idea of market direction from the data on his Bloomberg or Reuters data terminal, but you wouldn’t trade on the basis of the specific number the terminal lists for today. Any savvy market player would follow up by calling a broker and asking directly for a price. That misreporting of CDS prices is an open secret among insiders – but it would be hard for the regulators to change that situation.”

“Sounds like, at the moment, there’s nothing whatsoever to stop someone from doing a huge insider trade through one of those banks,” I said.

“There are some constraints. Swaps are legally subject to insider trading prohibitions. But to bring a case the authorities not only have to find out about the insider trading and narrow down who’s involved, they also need to assemble evidence to back up the charge. There are bound to be serious problems adjudicating a case because, as I said, insider trading is the essence of what the CDS is about.”

“As if they were trying to ban sinners from hell?”

“You’ve got it. But the second constraint is more important. Bankers have to think constantly about their reputational risk.”

“Ah! Now I know what Joe meant by that reference in his notebook to ‘REP RISK 2HUGE.’ Zack Nodding was telling Joe the reputational risk would keep banks from getting involved in such a scheme.”

Helmut nodded. “Fewer than twenty banks are serious players in the over-the-counter single-name CDS market and just a handful take care of the majority of the trading. I can’t think of even one bank whose managers would feel relaxed about doing a gigantic and obviously fraudulent trade – a trade that surely would come back to haunt them once word got out. The non-U.S. banks have their home country regulators to worry about. And banks around the world are scared to death of attracting the attention of the long-armed US authorities.”

“Or as Joe quoted Nodding as saying, the IRS and the SEC would come down like a ton of bricks.”

“Nodding’s right about that. And if a customer hit the jackpot more than once, going really big on days when some North Korean weirdness occurred and making multiple fortunes, the banker-brokers representing that customer might figure it was no coincidence. If they knew what was good for them they’d raise a public stink right away and make sure all the blame fell on the customer.”

“So if someone wanted to make a killing in the CDS market using insider knowledge from North Korea,” Lang said, “the first step would be to find a compliant banker-broker willing to take the risk of handling the trades?”

“Exactly. Next to impossible to find one, I’d say, especially after the first time the customer hits it big and it becomes obvious he had to have insider information. Otherwise, we’d be talking about the perfect crime.”

Asia Sentinal reviewer John Berthelsen wrote that Nuclear Blues features “a behemoth investment bank that could be mistaken for Goldman Sachs. The book contains some of the clearest explanations of what credit default swaps are, and how they are used, outside of a financial textbook.”