There was outrage in certain quarters when a report in the Financial Times on October 8 said that a Vatican investment portfolio had purchased structured notes that included default swap exposure to Hertz, the car rental firm that filed for bankruptcy in May.
The Pope gave a speech on the same day that could be taken as criticism of the deal, which was among many unorthodox investments made under the supervision of a cardinal who has since been stripped of his duties.
“Financial speculation fundamentally aimed at quick profit continues to wreak havoc,” Pope Francis told anti-money laundering experts from the Council of Europe who happened to be visiting the Vatican on the day the FT report was published, in one of the many odd twists in the story so far.
Observers were quick to point out that the Vatican had attacked the derivatives industry in 2018 in a document approved by the Pope.
That bulletin characterized over-the-counter trading as an “ethical void” and took particular aim at the “economic cannibalism” that can result from buying credit protection in the hope of engineering a default that will make a swap pay off.
Bemused derivatives markets participants mostly shrugged off the 2018 criticism, though Chris Giancarlo, an observant Catholic who chaired the US Commodity Futures Trading Commission at the time, took the trouble to write a lengthy rebuttal.
“In many ways, the greatest beneficiaries of global derivatives activities may well be the world’s hungriest and most vulnerable,” Giancarlo said, in a touching declaration of faith in his industry.
Revelations
One aspect of the more recent revelation about Hertz default swap exposure that has been widely overlooked is that the trade seems to have been well-timed and profitable.
The structured notes reportedly matured in April this year, just before Hertz filed for bankruptcy, and paid out in full.
A typical trade of this type would have a five-year maturity and feature exposure to a basket of corporate default swap reference entities, such as Hertz.
The Vatican seems to have been long corporate credit in a trade equivalent to investing in a portfolio of company bonds.
Another deal detailed by the FT was an investment in a luxury property development in London’s Knightsbridge that was far more suspiciously structured, as well as less successful.
Maybe the moral of the story is that the Vatican should stick to default swap trading, though only in deals that involve going long credit, of course.
Derivatives experts recently came up with a new product that could have been tailored for the Vatican: the iTraxx MSCI ESG index, which offers exposure to European corporate default swaps screened for environmental, social and governance criteria.
The index has been suffering from low liquidity, despite the broader boom in ESG investing, which could represent an opportunity for the Vatican to sow bountifully in order to reap bountifully.
