Fools’ gold

Published: 05 April, 2004

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Bankers who think that credit derivatives give them risk protection may find themselves on the wrong end of market mispricing. Natasha de Teran reports.

For some while now the world’s leading banks have been seen as the villains of the credit derivatives (CDs) markets. They parcel up their poorly performing assets, it is claimed, and sell them on to unsuspecting investors. Then, when a credit blows up – Enron, Worldcom, Parmalat – it is the insurance companies and other investors that take the hit and not the banks, complain critics. It is great for the world financial system as bank collapses are avoided. But dreadful for shareholders and buyers of with-profits policies from insurance firms whose returns are ruined.