Comments on: Weakening derivatives’ super-priority http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: traducere romana daneza http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/comment-page-1/#comment-53377 Mon, 29 Sep 2014 13:52:59 +0000 http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/#comment-53377 Generally I don’t read post on blogs, but I wish to say that this write-up very forced me to try and do so! Your writing taste has been surprised me. Thank you, very great post.

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By: RS3 http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/comment-page-1/#comment-10225 Sun, 20 Dec 2009 20:26:28 +0000 http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/#comment-10225 In a forthcoming article in the Harvard Law Review, I like Roe argue that the bankruptcy priority for derivatives discourages monitoring and thus probably contributed to the 2008 financial crisis. I also show how these exemptions encouraged AIG to take on correlated risks, selling guarantees on mortgage-backed securities while at the same time buying up subprime MBS for its own investment portfolio. Contrary to standard accounts, this conduct probably was rational from the perspective of AIG’s shareholders. Here’s a link:

http://papers.ssrn.com/sol3/papers.cfm?a bstract_id=1394995

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By: csissoko http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/comment-page-1/#comment-10202 Sat, 19 Dec 2009 02:31:39 +0000 http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/#comment-10202 I understand how the safe harbor provisions protect each individual bank from losses. I just don’t understand how to relate the fact that individual banks are protected from losses to systemic risk.

It seems to me that managing the risk of losses is precisely what banks are supposed to do. How can protecting banks from losses help them play the role of credit risk managers in the economy?

My question really is: what is the model of systemic risk that explains the safe harbors? Is the FDIC claiming that there is some linear relationship between the losses incurred by individual bank and systemic risk? If so, why does this relationship exist? I really just don’t understand.

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By: alea http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/comment-page-1/#comment-10201 Sat, 19 Dec 2009 01:00:17 +0000 http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/#comment-10201 “In order to reduce systemic risks…..The statutory safe harbors allow parties to these contracts, with some exceptions, to terminate and net their exposures and liquidate any pledged collateral to protect them from losses that could result from market fluctuations if the counterparties were subject to lengthy insolvency proceedings.”
That’s clear enough, carrying positions for a lengthy and uncertain period time is riskier than netting and closing them out immediately.

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By: csissoko http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/comment-page-1/#comment-10185 Fri, 18 Dec 2009 20:51:43 +0000 http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/#comment-10185 Alea:

Somebody needs to explain the ASSUMPTION that the exemptions that grant super priority to derivatives and repos “reduce systemic risk”. Yes, I know, the FDIC and the President’s Working Group and many others have stated that this is the case, but I’ve never seen a coherent explanation of WHY this would be the case.

(i) You don’t need super-priority to grant derivatives traders the right to net their contracts. This can be done under the supervision of a bankruptcy court.

(ii) When legal scholars look at the systemic risk argument they conclude that it is at best a red herring (http://papers.ssrn.com/sol3/papers.cfm? abstract_id=589261) and at worst a facade to facilitate a direct transfer to financial institutions (http://papers.ssrn.com/sol3/papers.cfm? abstract_id=1265070)

(iii) We’ve just seen how super priority makes it possible for bankers to run legally on other banks.

I’ve been making a similar argument to Professor Roe’s at my blog and just posted a powerpoint version (http://www.slideshare.net/csissoko/the- legal-foundations-of-financial-collapse) .

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By: alea http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/comment-page-1/#comment-10178 Fri, 18 Dec 2009 16:34:39 +0000 http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/#comment-10178 Maybe You, Felix and Brad Miller should read some of FDIC material (and the FDI Act) on the matter before drawing wild conclusions.
“In order to reduce systemic risks, however, both the Bankruptcy Code and the FDI Act have long provided exceptions from many of these restrictions for certain defined financial contracts—securities contracts, commodity contracts, forward contracts, repurchase agreements and swap agreements. In the FDI Act, these contracts are defined as qualified financial contracts, or QFCs. The statutory safe harbors allow parties to these contracts, with some exceptions, to terminate and net their exposures and liquidate any pledged collateral to protect them from losses that could result from market fluctuations if the counterparties were subject to lengthy insolvency proceedings.

Under the FDI Act and other U.S. insolvency laws, a party to a derivative contract has four key rights after commencement of insolvency proceedings……”
http://www.fdic.gov/bank/analytical/fyi/ 2005/101105fyi.html

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By: o_nate http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/comment-page-1/#comment-10177 Fri, 18 Dec 2009 16:29:08 +0000 http://blogs.reuters.com/felix-salmon/2009/12/18/weakening-derivatives-super-priority/#comment-10177 Adding the word “super” to “super-priority” makes it sound somehow different than the concept of priority which is already long established in bankruptcy law. Why is the priority of collateralized counterparties in a derivative transaction somehow worse than the priority of senior secured creditors over unsecured creditors in a regular bankruptcy case? Why is one kind of priority good and another bad? I think that priority is a useful concept as long as the rules are applied fairly and consistently. It helps to improve the functioning of credit markets to have different seniorities of creditors. It’s basically the same concept that allows a consumer borrower to take out a mortgage on their house in which the lender gets first claim on that house in the event of bankruptcy. Is that unfair to the credit card issuer who doesn’t get a claim on the house? Should the mortage lender not try to collect on the mortgage payments because that might force the borrower to fall behind on their credit card bills? The argument is fallacious.

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