Thursday, 12 October 2017 09:12

Goldman’s Big Bet on the Next Crisis

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(New York)

Goldman Sachs and JP Morgan are thinking about the next financial crisis, a lot. The banks are both now offering a structure to enable anyone to bet on the next crisis. The pair are making markets in special derivatives that allow investors to bet on high-risk banks bonds that would get wiped out if a lender runs into problems. The products, known as total return swaps, will soon be traded by other banks as well. The derivatives are based on Tier 1 notes, or bonds designed to protect the public from a taxpayer-funded bailout. They yield about 4.7%, or 10x more than a senior bank bond.

FINSUM: With the big surge in markets and the uncertainty surrounding valuations, there is some logic to this. However, banks are a lot better capitalized, and we doubt they will be at the center of the next crisis.

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