Tuesday, February 23, 2010

Death by structured products

My bank just tried to sell me their latest exploding financial product.

You get a 3 year bond from a major bank in Spain for 3%. Then the bank writes a CDS using that bond for another 1.5%. Woohoo! 4.5% yield on a 3 year A- bond!

(except for the tiny fact that in any restructuring, failure to pay or default will see you immediately lose 100% of your capital. You've just sold your rights for any recovery.)

The nice thing is that the sales guy pretty much admitted it was crap and that he was only flogging it for the commission.

I don't understand why banks are allowed to sell these things.


Jeremy Holland said...

Not quite on topic, but thought you'd enjoy this


Graeme said...

What else would they do if they weren't allowed to sell them. Now that they've given up all activities traditionally associated with banking.

Rab said...

Finally something we can agree on... ;-)

This research note by Variant Research caused quite a hoo-ha a few months ago in FT Alphaville. A Spanish outfit (Iberian Equities) launched a counter note and handbags were put down.

Until last week, when Credit Suisse published a superb note on Spanish banks, pretty much agreeing with Variant but with more tact and nicer graphs and better evidence.

As the great Taleb has said "buying CDS from a bank is like buying insurance from the captain of the Titanic"

santcugat said...

With its oversized banking sector, Catalunya would be smart to wait for separation until after the central government has bailed out its banks :)

The Iberian Equities report did make a bunch of good points about the supposed 470bn euro hole.

Jeremy Holland said...

it seems when it come to banks, it's better to err on the side of cynicism. For example "the commercial sector in Spain" is in good shape. They said that in the states too.