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Report: Goldman Sachs, Blackstone resolve dispute over Hovnanian bonds

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Report: Goldman Sachs, Blackstone resolve dispute over Hovnanian bonds

Goldman Sachs Group Inc. and Blackstone Group LP have resolved a standoff related to a controversial derivatives trade on bonds issued by Hovnanian Enterprises Inc., The Wall Street Journal reported, citing people familiar with the matter.

Blackstone's GSO Capital Partners LP offered inexpensive, long-term debt to Hovnanian in exchange for the homebuilder intentionally triggering a credit event. Blackstone had bought insurance against a default and stood to make money from the skipped interest payment from Hovnanian. This arrangement put Goldman Sachs at the risk of losing money.

Goldman Sachs and Blackstone have "effectively zeroed out" the trade between them and Blackstone has agreed to assume Goldman's position, the people familiar with the matter told the Journal.

Investors have panned the move as underhanded and U.S. regulators have issued a warning against such manufactured defaults, the May 24 report noted. The report also pointed out that Hovnanian had the funds to make the missed interest payment and is not in a dire financial position.

The issue has raised concerns over the market's vulnerability to manipulation and could tempt more borrowers to make such deals with lenders and skip payments they could otherwise afford to make. The Commodity Futures Trading Commission also sounded a warning in April regarding manufactured credit events and their threat to the integrity of the market.

The complaints by investors and the commission's warning led to Blackstone reducing the size of its trade, the report noted, citing a person familiar with the matter. Blackstone has acknowledged the regulator's concerns and said it would support "appropriate changes" to credit-default swap contracts, according to the report.

Hedge fund Solus Alternative Asset Management LP filed a lawsuit against Blackstone and Hovnanian in January and was reported in April to be looking at ways to step up its legal battle.