Comments on: Is Britain really going bankrupt?

By: Matthew

Matthew — Mon, 26 Jan 2009 15:19:59 +0000

Typically* the cost of CDS has equalled the difference between the reference bond and the safest (in this case Bunds, I guess). Thus all the Treasury needs to do is bundle a UK Gilt CDS with every Gilt. This will cost nothing as the now the bonds are risk-free the spread over Bunds will decline by the same amount as the CDS costs. Oh yes.

* i.e. when no-one thought they would ever be used. Does anyone what the outstanding issue of CDS on UK sovereign debt is? I remember a BIS study a few years back saying triple-A rated soveign debt CDS were tiny.

By: Richard J

Richard J — Mon, 26 Jan 2009 11:07:00 +0000

Partially inspired by having to write an email complaining about their fees, one of the tacit reasons why people get an audit from the Big Four is that they have huge PII cover (which costs a fortune). This suggests to me that audit committees might be better serving their shareholders by getting the company audited by Bloggs, Cobbley and Doe LLP and recommending that the financial stakeholders take out enough derivatives to cover their losses any audit failings that may arise…

By: John B

John B — Mon, 26 Jan 2009 10:25:09 +0000

To be fair to ’sophisticated’ financial investors, it may be more about ‘nobody ever got fired for…’ syndrome than a genuine belief held by the trader that the cover is useful.

By: Richard J

Richard J — Mon, 26 Jan 2009 10:23:01 +0000

Alex – this does, incidentally, suggest that sophisticated [1] financial investors fall prey to the same psychological trick that the offer of extended warranty cover uses…

[1] Insert sarcastic quotation marks to taste.

By: Rick

Rick — Mon, 26 Jan 2009 09:49:11 +0000

Thanks for the link John. It seems Ken Clarke, the Provisional Shadow Chancellor, agrees.

I hope we both turn out to be right!

By: Alex

Alex — Sun, 25 Jan 2009 17:06:44 +0000

But so long as a significant number of people think “£1m worth of Treasuries – safe, £1m worth of Treasuries plus £10,000 worth of CDS – saferer”, you can make money writing insurance you’ll never have to pay out on.