Goldman Sachs and JPMorgan are pitching a way to profit from the next financial collapse

The big shortParamount PicturesCould AT1 derivatives be the next ‘Big Short’?

LONDON — Goldman Sachs and JPMorgan are offering clients a new investment product that gives them a chance to bet on the next banking crisis.

Both Wall Street giants are now making a market for derivatives which offer investors the chance to bet on or against bank bonds known as Additional Tier 1 notes, according to a Bloomberg report.

Additional Tier 1 notes (or AT1 notes) are securities issued by major lenders in the aftermath of the Eurozone debt crisis as a means to protect taxpayers from expensive bail outs in the event of another crisis, with the risk instead borne by investors.

The bonds yield an average of around 4.7%, according to Bloomberg’s story. Generally speaking the yield on normal, long-dated debt issued by major banks is less than 1% in the current climate.

As such, AT1s are seen a good way to make a solid return from a pretty safe asset, in a world where low interest rates and huge central bank bond buying programmes have driven down yields. Consequently, AT1s have attracted huge amounts of investment, with a global market of around $US150 billion.

That ballooning value has prompted Goldman and JPMorgan’s creation of the new derivative which comes in the form of a so-called “total return swap” — which gives investors the ability to hedge increases or decreases in the value of a basket of AT1s from numerous banks.

A trader using the derivatives to bet against AT1s would potentially win big in the event of a financial collapse, as these bonds are tied to the health of European lenders.

Citing Max Ruscher, the director of credit indexes at IHS Markit, Bloomberg said that other lenders are also set to start offering the products in the coming weeks.

The derivatives — which Goldman’s co-head of European credit flow trading Manav Gupta told Bloomberg offer “a very useful addition to the toolkit that our clients use in managing risk and taking broad-based exposure to the AT1 market” — have been compared to the credit default swaps linked to the US sub-prime mortgage market which played a large role in the 2007 financial crisis.

The trading of those swaps was famously portrayed in Michael Lewis’ book “The Big Short” and a subsequent film.

You can read Bloomberg’s full article on AT1 derivatives here.

Get the latest Goldman Sachs stock price here.

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