blasts from the past

As Greece prepares to default on its new bonds, now seems as good a time as ever to fix the problems that occurred when it defaulted on its old bonds. Remember that? Basically there was this thing where if you had a Greek bond with a face amount of €100 and CDS on that Greek bond, and that Greek bond got poofed into a new Greek bond with a face value of €20 that traded at par, then your CDS would pay out not the expected €80 that you lost on your first bond but rather €0 because the second bond was deliverable into CDS and it traded at par. Which makes no sense if you view CDS as hedging your losses on the first bond, which to a reasonable approximation you do.

Fortunately, though, in the particular case of Greece, the new bonds were split into lots of little tranches and one of them basically looked like the old bonds, value-wise (though not otherwise), and so everything worked out and actually made CDS buyers a little bit of extra money. So that was nice for them, but otherwise it was all just terrible.

So this gets a yay: Read more »