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Contest You Don't Want to Win

race to the top = race to the bottom data source: Bloomberg hide caption

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data source: Bloomberg

Simon Johnson of MIT sent me this chart last night. It shows the price you have to pay if you want insurance against, say, Citigroup defaulting on a bond you might own.

The higher the price, the worse shape the market thinks that company is in.

American Express actually leads the list on this chart.

With a little math you can translate the price of insurance into what the market thinks the chances are that the company will default and not be able to pay you the money it promised when it sold you the bond.

James Kwak, who writes the blog Baseline Scenario with Simon, pulled up the numbers:

"The implied probability of default within 5 years is 42% for American Express and 39% for Citigroup, according to Bloomberg. That is using Bloomberg's default setting of a 40% recovery rate. (If you assume a higher recover rate, you will get a higher implied probability of default.)"

Baseline Scenario has a great explainer on all this. As you may have guessed, that chart shows the price of a credit default swap. Yes, those things that almost doomed AIG. Turns out they're also pretty handy indicators.