Marketwatch reports that the federal appointment of a “Car Czar” could trigger a “credit event” for Ford and GM’s credit-default swaps, according to Bank of America Securities analyst Glen Taksler. Taksler points out that the International Swaps and Derivatives Association, the trade association that acts as a standard-setter for credit derivatives trading, says one trigger for a bankruptcy credit event is the appointment of an administrator, trustee or similar official to oversee all or most of an entity’s assets. But it’s unclear whether the potential car czar’s powers would correspond with the ISDA definition. The authority to review and prohibit certain transactions, or what’s been discussed in one piece of draft legislation, is different from having control over assets, Taksler noted. “The result may depend on the exact wording of a potential bailout package,” he wrote in a report made public late Tuesday. “We find arguments both for and against an autos czar triggering CDS,” he said, adding: “The actual process is likely to be determined through ISDA.” MW concludes that if the auto maker bailout does amount to a credit event, it would create another shock in the $50 trillion market for credit default swaps. Talk about unintended consequences! Stay tuned…
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One more example of the law of unintended consequences. Another question comes up with this bailout, and nobody knows the answer. Folks, these questions will keep coming and coming and coming, most of them AFTER the deal is done and we have started down the road of no return. This will be the first rollout of this system, which will be great in theory, but will work no better than anything else that is cobbled together in a panic with no time to test it.
At least in a C11, everyone knows the rules, most of the gray areas have already been litigated in thousands of previous cases, and we have a neutral judge running the thing without regard to politics. In other words, the process has been tested in the real world, and it usually works pretty well.
With a car czar, it might happen. With a Chapter 11 filing, it would definitely happen.
Since GM and Chrysler are both promising to file 11 if they don’t get the money, there is no disadvantage, net-net.
On the other hand, it would be really stupid for the federal government to give these companies money without supervision or strings attached. Handing them billions without a referee securing the taxpayer’s interests would be nuts, even for those who support the bailout.
The government setting strings and so forth to this money is just another death-knell for those companies. A dark scenario is that various obligations and commitments elucidated “for the taxpayers” in the bail-out scheme presents an extra-legal definition of obligations that could transcend the tried-and-true Chapter 11 case law and process, when Chapter 11 inevitably comes.
This would be especially onerous if those types of obligations included politicized horsesh*t regarding operations such as “green tech” and “jobs” that are permanent albatrosses on the companies truly re-organizing once they are in Chapter 11. Ironically and fittingly, this bail-out “pseudo-bankruptcy” that is being pitched as the best alternative to real bankruptcy will poison the actual bankruptcy all the more when (not if) it comes.
I would wager that if this bail-out bill passes, it will doom these companies to a messy, quasi-legal Chapter 7 filing down the road that will just be a billable-hours playground for lawyers and a total loss for all the real creditors and investors in these now-doomed enterprises.
I would wager that if this bail-out bill passes, it will doom these companies to a messy, quasi-legal Chapter 7 filing down the road that will just be a billable-hours playground for lawyers and a total loss for all the real creditors and investors in these now-doomed enterprises.
Not a bad bet, but it’s six of one, half dozen of another.
If Uncle bails them out, the major creditors have little incentive to make major concessions because it will be clear that the government will not tolerate a Chapter 7 wipeout. So that raises the price of a pre-pack.
If Uncle doesn’t bail them out, creditors will probably take what they can get and force the 11 into a 7. The bondholders who recently paid low prices are especially motivated to say no, because they will probably still make a profit in a liquidation.
Neither path provides a solution. The prepackaged BK is not doable at this time, with all of the cards that are on the table and the lack of credit in the credit markets.
This is one reason why I favor a version of Chapter 7 that puts the assets into the hands of someone else — the obligations get wiped out, the bondholders and lenders become irrelevant, and the sale of the assets should bring to the table a new management team that can actually turn around the company.
If the Big 2.8 get the money now, they will be back within a couple months(think Jan. 21) for more.
This is one reason why I favor a version of Chapter 7 that puts the assets into the hands of someone else — the obligations get wiped out, the bondholders and lenders become irrelevant, and the sale of the assets should bring to the table a new management team that can actually turn around the company.
That would be a very good solution, which by its quality of resolution and cost inversely imperils anything like that happening, its almost a logarithmic function that way….lol.
It is SO damn hard to get that toothpaste back into the tube!
«“Car Czar” could trigger a “credit event” for Ford and GM’s credit-default swaps»
This is distraction and misdirection.
No political apointee named to manage the industry to save the unions is ever going to force the bankruptcy, betray those who appointed him, and work herself out of a job.
Whoever wrote that is just trying to make the Dead Three bailout more palatable to the tax-concerned reader.
vww12: You misunderstand. This is not contingent upon the czar doing anything, rather a “credit event” could be triggered by the mere appointment of said czar.
Edward and Robert: I have a suggestion, for the remainder of the week, when-ever you write “Draft Bill” can you drop the “R”.
«vww12: You misunderstand.»
Having re-read this at a more leisurely pace, I see my error. Thanks for the clarification.
Could someone please outlaw credit derivatives trading? What exactly is the point of having a market of gamblers placing bets on the possibility of a debt going unpaid? This is high stakes gambling, not investing.