Comments on: Do CDSs cause more bankruptcies? A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Lafayette Fri, 24 Apr 2009 17:04:18 +0000 Annubis: “Those who fail to learn the mistakes of the past are doomed to repeat them”, Victor Hugo.

Good notion, wrong author – who is George Santayana.

By: Carpe Wed, 22 Apr 2009 10:08:25 +0000 The HBS thesis for 2010 will be the CDS effect on GM bondholder negotiations. Theories here will be slightly more difficult to prove because the bondholders/CDS holders have the luxury of placing blame on the UAW for any failed negotiations rather than admitting that they might be getting a better payout in bankruptcy because of their hedges. And how beautifully the UAW are falling into the pawn role in this chess game!

The GM idea is good fodder for the bankruptcy case, now, here’s fuel for the opposite side of the spectrum. Pundits have failed to realize yet that FASB 157e has given CDS WRITERS the benefit. Despite whether investors will believe the level 3 marks proffered by banks, the whole essence of FASB 157e has made for less of a probability of default or credit event occuring. Because, for example, Citigroup can prolong the suspension of disbelief in a rubber stamped way, it’s no longer a higher certainty that the bank will implode. CDS writers should be lessed stressed by this, and hopefully, exerting decreased pressure on banks in a hedging sort of way.

By: jonathan Tue, 21 Apr 2009 18:11:20 +0000 My experience tends to agree with yours, with some caveats. First, having CDS changes the dynamics of the all-important creditors committee, from its inception and composition to how it votes. We’ve always had creditors with different incentives – such as suppliers generally want restructuring and continuance while financial creditors may want liquidation and payoff. Negotiation occurs not only between the debtor and creditors but among creditors, which is where the real deals are made. That’s important to remember and CDS shift the balance.

Second, another dynamic is that when a bondholder is protected that costs leverage because it’s recognized by the judge – who has tremendous power.

Third, the problem is that we’ve effectively altered these processes ad hoc. I don’t see them as a problem per se because they’re really only versions of what has always existed.

Fourth, one can argue that protection should be mandatory. This would change the bankruptcy dynamic again, because then the focus would tend to be not on financial creditors but on physical creditors who have a real stake in the actual business.

By: Sandrew Tue, 21 Apr 2009 17:41:43 +0000 Because I can’t trackback from tumblr: hedging-is-evil-the-fatal-flaw-in-the-ca se-for

By: Jose Tue, 21 Apr 2009 13:55:51 +0000 If a CDS writer takes physical delivery of the bond in a credit event, can they then get a seat at the negotiating table? This would seem to give another benefit of CDS – a firm could specialize in writing protection and negotiation with creditors, maximizing value in credit events, similar to how auto insurers are better litigators if an auto accident is disputed.

If CDS writers don’t have the right to sit at the negotiating table after taking delivery, perhaps it would be better to reform bankruptcy code to give them that right rather than get rid of or try to minimize credit default swaps?

By: Anubis Tue, 21 Apr 2009 13:35:22 +0000 That which is complicated can be confusing. That which is confusing, at times, can be clever deception. Transparency is good. Simplicity is better. Then the opportunity for deception is limited. Mortgage backed securities, hedge funds and CDSs exist because our government repealed regulations over the financial industry that were put into law in response to the Great Depression.

“Those who fail to learn the mistakes of the past are doomed to repeat them”, Victor Hugo.

By: Ray Lindsley Tue, 21 Apr 2009 12:46:09 +0000 CDS’ were like the rating agencies- another excuse for investors to not have to do due diligence before investing. there was plenty of laziness to go around. What was overlooked was the fact that you were just swapping your default risk from one party (the debt issuer) to antoher party (the CDS counterparty). However, if the CDS counterparty was large enough (i.e. AIG) your counterparty was really Uncle Sam.

By: Lafayette Tue, 21 Apr 2009 06:23:25 +0000 Salmon: “Call it sheer laziness, if you like, if you don’t want to ascribe any malign intent, but the fact is that there’s an opportunity cost to getting dragged into long and boring procedures, and often a quick financial deal is much easier and cheaper than doing hundreds of hours of forensic and accounting homework.”

Good point, but the fact remains that the CDS is a debt instrument anyway and when it comes to insolvency it weighs just as heavily in the issuing company’s accounting. It’s like having a risk covering band-aid that covers the sore but doesn’t heal it.

OK, you call it laziness and I’ll call it professional negligence but the entire process of securitization is being shown for what it boils down to — nobody wanted to take the risk for what was awful an credit lending mechanism without any sense of creditworthiness verification to establish debt riskiness.

The people responsible for this negligence were daft. And, obviously, too-big-to-fail. So we the taxpayer are now expected to poney-up their salvation?

Phooey, I say. Many Americans would be sooooo happy to see some perp-walks of the idiots who conceived this negligently bad process of Risk Management. They are or were in the regulatory system somewhere.

Justice done to them would be a salutary lesson for the future, of which our country seems to need more and more.

By: Don the libertarian Democrat Tue, 21 Apr 2009 01:09:46 +0000 A long time ago, about last September, when Lehman went bankrupt, I remember the words “hoisted”, “petard”, and “bankruptcy”, being used together quite a bit. The idea, as I remember it, was that bankruptcy had gotten way too hard, and bankruptcy should be made easier.

Whoa Nellie! Not so fast. Now we want bankruptcy to be harder. About the only thing that the two views have in common is a distaste for creditors, meaning people who lend companies money and have the audacity to want to get paid back and make money.

Talk about shooting yourself in the foot with a bazooka. How does it help us to market the buying of bonds as a flight to a haircut? Perhaps we should make the lending of money to companies more like charitable donations.

I favor a tax cut for investment. One way to do this is to get investors to want to buy corporate bonds. Mandating risk is not a good way to do that.I am seriously perplexed by these proposals.

Either people will stop buying bonds or they’ll demand much higher interest for their investment, meaning lower profits and wages.

What am I missing?

By: KenG Mon, 20 Apr 2009 22:45:39 +0000 Felix, if I didn’t know better, I would say it sounds like you are finding less and less justifications for CDSs every day…