28 October 2015 by lberuti
Fraud is a risk that cannot be modelled and is what can make credit a really asymmetrical asset in the most extreme instances. It is always damaging for a company’s image and leaves analysts questioning the reliability of the information they are given. But more often than not, when fraud is revealed at a company, it only represents a dent in the representation of the 5 year risk premium over time. It can be a really severe one like for VW ( Volkswagen AG ) this summer when the emissions scandal surfaced, or a milder one like for TSCO ( Tesco Plc ) last fall. At the moment, it looks as if the widening of IBM’s ( International Business Machine Corp ) 5-year-CDS will be contained following the disclosure yesterday that the SEC is looking into the accounting treatment of certain transactions in the US, the UK and Ireland. Apparently accounting for emerging technologies can be challenging, and so far investors have decided to (sort of) give IBM the benefit of the doubt, only pushing the 5 year risk premium 15bps wider at 59bps.