Betting on principal finance

Cover story

First came UBS. Then Deutsche Bank. Now this year Merrill Lynch and Bank of America have followed suit. One by one, some of the leading dealers are creating principal finance units dedicated to using credit derivatives, either as assets in their own right, or as a risk transfer mechanism for portfolios of other assets such as asset-backed securities (ABSs). Profits are often created from the classical structured finance arbitrages: finding fundamental value – that is, finding securities that are

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