Authorities probe Deutsche over Kaupthing trades, says article

Maybe this is one of transparency. If Kaupthing goes into the market and buys its own debt, then people look at Kaupthing and decide whether this is prudent financial management by Kaupthing or a sign of desperation to try to contain its funding costs. However if a seemingly unrelated third party is buying Kaupthing debt (selling CDS - the equivalent of buying debt), then the market can only really take it positively as it is seemingly an independent third party endorsement of Kaupthing's credit worthiness ?

This is fascinating for a few reasons. First, selling CDS protection is like buying back debt from the market (as the article admits). Banks do buy back debt to stabilize the market for the debt. So, is doing the equivalent with CDS really manipulation? Second, Kaupthing needed to lend funds to the SPV to enable the sale of CDS. Did Kaupthing borrow the funds?! Clearly adding debt would have the effect of pushing spreads out thereby defeating the purpose of selling CDS protection. Possibly the new debt was short-term while the CDS term was 5 years. Still, the idea of borrowing from the market to fund an SPV to sell CDS protection appears flawed in concept.