Felix Salmon
Getting up to fetch the Tabasco
How the Teamsters successfully played the CDS market
The fight between capital and labor has been a bit lopsided of late, so I’m quite happy to see that the Teamsters seem to have scored a real win from their latest PR campaign against Goldman Sachs.
Goldman Sachs stopped making markets in bonds and credit default swaps (CDSs) on US freight company YRC Trucking for around two weeks from December 16, as part of an effort to stave off a public relations catastrophe. The decision to stop quoting on YRC is understood to have been taken at a very senior level in Goldman, after freight union International Brotherhood of Teamsters (IBT) sent letters to congressmen, senators and state attorneys-general accusing the bank of encouraging investors to torpedo YRC’s restructuring – which would have threatened the jobs of around 30,000 IBT members.
Later on in the article there’s bellyaching from anonymous credit traders that the IBT seems to be using the CDS market as a bugaboo much more successfully than semi-mythical “empty creditors” have ever been able to use it to force bankruptcies. “The episode has sparked concern,” write the authors with a straight face, “that failing companies could use political pressure to strong-arm banks and investors into backing restructurings”.
Doesn’t your heart just bleed.
Personally, I’m far from convinced that empty creditors are a real problem. But if they can be used as a bogeyman to save jobs and prevent unnecessary and costly bankruptcies, then they will have served some good purpose. Well done to the Teamsters for executing this strategy so well, and I look forward to its being used again in future.
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Did you change course on the empty creditors issue? I seem to recall you being in Hu’s camp: http://blogs.reuters.com/felix-salmon/20 09/04/18/how-the-cds-market-makes-restru cturings-more-difficult/
I think that empty creditors *can* be a problem, in theory. I’m just not yet convinced that they *are* a problem, in practice.
So it would be better to close the CDS market… which leads to a wonky question. In terms of economic theory, why did adding a market (in this case CDSwaps) lower welfare?
Tomrus,
Assuming this is a net negative for welfare (and I have no idea whether it is), the simplified answer would be the holdout effect. To do a restructuring, you need substantially all creditors on board. The CDS swap gives a party an incentive not to be onboard. And so a transaction that destroys value (i.e., the company’s liquidation value is smaller than its going concern value by at least the CDS spread) can go through.
The question is, in these circumstances, why wouldn’t the other parties make a side deal to make not crashing the company worth its while?