From Felix Salmon at Reuters:
In hindsight, one of the silliest and most dangerous excesses of the Great Moderation was the large number of companies — foremost among them AIG, although there were lots of monoline insurers in the same trade — basically selling insurance on the world coming to an end. It’s a great trade: either the world doesn’t come to an end, and you make lots of money, or the world does come to an end, and it doesn’t matter ‘cos you’re bust anyway.
Now, however, after seeing how that trade worked out, we’re wiser, and no large and leveraged financial institution would have the chutzpah to start selling world-coming-to-an-end insurance. Would they?
Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis…
“The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don’t worry about interest-rate exposures any more – they just pay a fee to hedge it,” [says Citi's Terry Benzschawel].
Like a swap, the contracts envisaged by Citi would be entered into without an up-front premium, with money changing hands according to the index’s movements around a fair strike value.
I’d forgive you if your eyes started rolling after just the first four words: the phrase “credit specialists at Citi” is not exactly the kind of thing which instills enormous confidence in analysts and investors these days. After all, it was credit specialists at Citi who ended up losing the bank billions of dollars on trades which were meant to be too safe to fail. And this trade is in many ways even worse than the one put on by AIG, because Citi doesn’t even get any insurance premiums up front, but still needs to pay out enormously in the event of a crisis....MORE
When the Large Hadron collider was about to fire up we posted (April '08):
How many Nobel Laureates Does it Take to Make Change...And: End of the Universe Puts...That is why Long or Short is now offering LHC End of the Universe Puts. It’s a simple put option wherein the buyer retains the write to sell the Universe at a strike price of “Existing”. Based on our Black-Holes model used to value all “end of the world” options, the July 2008 vintage options are currently priced at $20....Followed by (Sept. '08):
Large Hadron Collider Starts Up, Earth Suvives, End of the World Puts Plummet
...UPDATE: The marketers at LoS Capital* are still pushing product:
*At Long or Short LLC, we leverage our superior intellect and extensive investing experience to recommend explicit Long or Short positions and related abstract trades, which may or may not be possible with real world financial derivatives. We use science to improve the lives of the rich....We continue to reiterate the importance of LHC End of the Universe Puts.
“The LHC is a discovery machine,” said CERN Director General Robert Aymar
If this is true and you extrapolate it out, it is only a matter of time until they discover the end of the Earth and existence as we know it. Who is to say they won’t do that tomorrow? Again, not us.
Recommendation: These securities do NOT benefit from the implicit guarantee of the US government, God or your locally relevant deity. Wink wink nudge nudge, but between you and me, they DO.
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