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    • Archive



    End of the World Trade

    July 2nd, 2008 by Stephen Roman

    I asked one investment banker what might cause half of North America’s top corporations to default. No ordinary economic recession or natural disaster short of an asteroid strike could do it: no hurricane, for example, and not even ‘the big one’, a catastrophic earthquake devastating California. All he could think of was ‘a revolutionary Marxist government in Washington’. That’s not a likely scenario, yet the cost of insuring against it had shot up ten-fold. Normally one can buy $10 million of end-of-the-world insurance for between two and three thousand dollars a year. By early last November, the prices quoted were between twenty and thirty thousand, and even then it was difficult to buy in quantity – at least, said the banker, ‘not from anyone you trusted’.

    …

    All this activity explains the attractiveness of the end-of-the-world trade. The trade is the buying and selling of protection on the safest, super-senior tranches of the investment-grade indices. No one buys protection on these tranches because they are looking for a big pay-out if capitalism crumbles: if nothing else, they have no reason to expect that the institution that sold them protection would survive the carnage and be able to make the pay-out. Instead, they are looking to hedge their exposure to movements in the credit market, especially in correlation. Traders need to demonstrate they’ve done this before they’re allowed to book the profits on their deals, so from their viewpoint it’s worth buying protection, for example from ‘monolines’ (bond insurers), even if the latter would almost certainly be insolvent well before any pay-out on the protection was due.


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    Posted: July 2nd, 2008 under Americas, derivatives.
    Comments: none

    Insurers to Banks: Swap Guarantees for Nothing

    June 24th, 2008 by Stephen Roman

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    Posted: June 24th, 2008 under derivatives.
    Comments: none

    “Should Analysts Who Don’t Own Stocks Be Trusted?”

    June 17th, 2008 by Stephen Roman

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    Posted: June 17th, 2008 under Americas, Equities.
    Comments: none

    “The Criminalization of Failure”

    June 16th, 2008 by Stephen Roman

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    Posted: June 16th, 2008 under Americas.
    Comments: none

    Protectionism for Profit – Now Doctors get in on the Racket

    June 13th, 2008 by Stephen Roman

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    Posted: June 13th, 2008 under Americas, Asia.
    Comments: none

    “Ever wonder why fund managers can’t beat the S&P 500? “

    June 12th, 2008 by Stephen Roman

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    Posted: June 12th, 2008 under Americas.
    Comments: none

    Oil Up Again

    June 11th, 2008 by Stephen Roman

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    Posted: June 11th, 2008 under Americas, oil.
    Comments: none

    China > USA

    June 9th, 2008 by Stephen Roman

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    Posted: June 9th, 2008 under Asia, Emerging Markets.
    Comments: none

    “House prices are falling even faster than during the Great Depression”

    May 29th, 2008 by Stephen Roman

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    Posted: May 29th, 2008 under General.
    Comments: none

    The Bear Collapse – WSJ’s Incredible Reporting

    May 28th, 2008 by Stephen Roman

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    Posted: May 28th, 2008 under Americas.
    Comments: none

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