Allied Irish Banks (AIB) Credit-default Swaps Trading With 60 Points Upfront!

AIB has something like $250 billion in assets - a really big bank.

Credit-default swaps on subordinated debt of Allied Irish Banks were 60 per cent upfront and 5 per cent a year, meaning it costs €6 million in advance and €500,000 annually to insure €10 million of the bank’s debt for five years. CDS on the subordinated debt of Bank of Ireland cost 33 per cent upfront and 5 per cent a year.

Credit default swaps will start to trade with points (percentage points of the notional) upfront when there is a risk that a credit event would take place before the protection seller has received any income from the CDS. In late October 2008, protection on AIG was costing 42 percentage points upfront and 5 percentage points a year.

This may not matter to U.S. markets right now, but it will.