![]() It works great until B craters and takes C, who has been busily selling a bunch of these swaps to any and all comers, with them. Either way he figures B just might default, so A buys insurance in the form of a CDS from Firm C. ![]() Or maybe the trader simply doesn’t like the prospects of B and wouldn’t touch the bonds with a 10-foot pole. Some trader with Bank A buys the diseased bonds of Institution B. We discovered banks like to buy and sell derivatives such as Credit Default Swaps, purportedly to hedge risks. It also carries lots of “non-performing” loans.Īnd the low-interest-rate regime imposed by European Central bank is suffocating profitability.īankers introduced the world to the concept of “systemic risk” when Lehman Brothers collapsed. DB holds something on the order of $70 trillion dollars in notional value of derivatives exposure. Last week the IMF hammered DB in a report labeling the troubled German firm as the riskiest financial institution in the world. Then there is Germany’s Deutsche Bank (NYSE:DB). Portuguese banks aren’t in much better shape. ![]() Italian officials used the panic around Brexit and fear of a run on their banks to lobby for the special accommodation. In news that was largely overlooked, EU officials just granted a $150 billion emergency bailout measure for Italian banks who are drowning in bad debt. All is not well with global banks, and Brexit isn’t helping. Bonds and metals may be telling investors something wicked this way comes. The surge in precious metals prices corroborates the flight to safety we’re seeing in bonds.
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