Today’s the big day for the uniquely recalcitrant debtor’s second big D in 13 years, now that its least favorite jurist has reiterated once again that, its best efforts not withstanding, it isn’t allowed to pay only the creditors it wants to pay while piously promising to “meet its obligations, pay off its debts and honor its commitments,” except maybe to these vulture usurers “trying to bring us down to our knees.” Well, maybe not the big day, since failure to pay today—and U.S. District Judge Thomas Griesa made very clear that the “illegal” payment “will not be made,” or he’s gonna start holding people in contempt—amounts to a mere “technical” or “selective” default for 30 days. Then, maybe Moody’s will do something about it. Read more »
Retail clients are not typically paragons of rationality or possessors of Black-Scholes calculators so a good way to make money is to bamboozle them with mispriced derivatives. The classic way banks do this is with structured notes, where you combine a bond worth $75 and an S&P option or whatever worth $15 and sell the combination for $100 because who has time to check your math, really. In the early years of this century life insurance companies came up with a clever variation on this idea. The variation was:
- Combine a bond worth $75 and an S&P put option worth $15.1
- Sell the combination for like $80.
- Hope everyone forgets about it.
This was an amazing plan. You can see why it sold well? You can also see why it did not really work, for the insurers? It totally totally did not work, for the insurers, and yesterday Moody’s issued a report about it saying basically “a lot of life insurers are kind of fucked because of this,” which, sure, but what were they expecting?
Here’s what they were expecting: Read more »