Unnamed Hedge Fund or Investor Earned $10 Billion Betting on U.S. Downgrade

According to The Daily Mail,

A mystery investor or hedge fund reportedly made a bet of almost $1billion at odds of 10/1 last month that the U.S. would lose its AAA credit rating.

Now questions are being asked of whether the trader had inside information before placing the $850million bet in the futures market.

The Daily Mail suggests this might involve George Soros, but a knowledgeable source denied it. The article also suggests that whoever made the bet could have had inside information–arguing that Obama and Geithner seem to have known for some time that a downgrade by S&P was in the works. Of course The Daily Mail is a conservative rag.

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.

Recall that Eric Cantor was revealed to have an investment that would have paid off handsomely if the U.S. had defaulted. Salon reported on June 27:

Last year the Wall Street Journal reported that Cantor, the No. 2 Republican in the House, had between $1,000 and $15,000 invested in ProShares Trust Ultrashort 20+ Year Treasury EFT. The fund aggressively “shorts” long-term U.S. Treasury bonds, meaning that it performs well when U.S. debt is undesirable. (A short is when the trader hopes to profit from the decline in the value of an asset.)

According to his latest financial disclosure statement, which covers the year 2010 and has been publicly available since this spring, Cantor still has up to $15,000 in the same fund. Contacted by Salon this week, Cantor’s office gave no indication that the Virginia Republican, who has played a leading role in the debt ceiling negotiations, has divested himself of these holdings since his last filing.

Why are these kinds of investments bets even legal? This is nothing but high stakes gambling, and it’s just plain wrong.