ThePanelist.com - Bank Default Insurance Seems Meaningless

Bank Default Insurance Seems Meaningless

Written by David Neubert

Tuesday, 01 April 2008

Check out this list from Bespoke Investor of the cost of bank default insurance. The highest costs go to Lehman and Merrill and other American Banks while the lowest prices are European.

I think this is the result of the implied government guarantee that most investors believe is far stronger in Europe.

However, now that the global financial system is so strongly intertwined I don't think the world financial system could handle a default resulting in the liquidation of any bank on the list.

So does that mean all these banks' default insurance should be trading at government rates?

Disclosure: I own the following securities from the aforementioned list: Debt of Lehman, Bear Stearns and Citigroup; equity of Lehman, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America. I am a former Managing Director at Lehman and Morgan Stanley. I was an associate at Chemical Bank (a precursor to JPMorgan).

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Comments (2)

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written by Adam Waitt , April 02, 2008

How much faith do you have in FDIC? Moi? Très peu.

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written by David Neubert , June 12, 2008

FDIC. The most faith. The government will print money till the cows come home rather than allow the faith in the banking system to collapse and thus our entire transactional system.

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