Comments on: How the Teamsters successfully played the CDS market http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/ A slice of lime in the soda Thu, 23 May 2013 05:23:13 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: AnonymousChef http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/comment-page-1/#comment-11728 AnonymousChef Tue, 02 Feb 2010 19:49:12 +0000 http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/#comment-11728 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? 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?

]]> By: tomrus http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/comment-page-1/#comment-11725 tomrus Tue, 02 Feb 2010 17:45:57 +0000 http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/#comment-11725 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? 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?

]]> By: Felix Salmon http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/comment-page-1/#comment-11724 Felix Salmon Tue, 02 Feb 2010 17:43:57 +0000 http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/#comment-11724 I think that empty creditors *can* be a problem, in theory. I'm just not yet convinced that they *are* a problem, in practice. I think that empty creditors *can* be a problem, in theory. I’m just not yet convinced that they *are* a problem, in practice.

]]> By: Sandrew http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/comment-page-1/#comment-11721 Sandrew Tue, 02 Feb 2010 16:39:45 +0000 http://blogs.reuters.com/felix-salmon/2010/02/02/how-the-teamsters-successfully-played-the-cds-market/#comment-11721 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/2009/04/18/how-the-cds-market-makes-restructurings-more-difficult/ 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/

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