Credit-default swaps can push companies right over the edge

[Robbien]

Six Flags filed for bankruptcy last month, but don't blame the recession driving down attendance at its amusement parks.

Don't blame the credit markets for impeding Six Flags' access to fresh capital, either.

Both of those factored in the company's decline, but the biggest culprit in its Chapter 11 filing was its own creditors.

They had nothing to lose.

Several large Six Flags bondholders voted down an offer that would have kept the former AstroWorld operator out of bankruptcy and given them an 85 percent equity stake in the company. Now, unsecured creditors may get as little as 10 percent.

The bondholders who stonewalled the settlement offer had a secret weapon: credit-default swaps.

Those same arcane financial instruments that played a central role in last fall's global economic meltdown now may redefine how companies resolve their own financial crises, forcing more them into bankruptcy.

That means more equity investors may get wiped out in corporate reorganizations and more employees may lose their jobs as companies cut costs in Chapter 11.

Credit-default swaps function like insurance for debt investors, essentially guaranteeing that they get paid even if the debtor Six Flags in this case defaults. So rather than taking 85 percent, the swaps-holding Six Flags creditors allowed the company to file for bankruptcy, knowing the swaps would ensure they recover all of their investment.

more . . .

http://www.heraldtribune.com/article/20090723/COLUMNIST/907231041/-1/NEWSSITEMAP


Which answers the question of why auto companies were pushed into bankruptcy.

[Demeter]

1. It's Cannibalism, Robbien

What are they going to do when every other business has been destroyed by CDS?

[Robbien]

5. When anyone can buy a swap on any company

I wonder how many CDS holders were shouting for the bankruptcy of GM, Chrysler, General Growth, etc. And how many of those CDS holders claimed their swap repayment from AIG.

[sam sarrha]

2. it's welfare for criminals.. tax buying them/eleminate them,

[dixiegrrrrl]

3. Did you notice how incredibly fast GM went thru bankruptcy?

And emerged " leaner" ready to make and sell cars again.
without all those pesky union contracts and pensions, of course.

[Demeter]

6. Not to Mention All the Liability Lawsuits Were Nullified Instantly

thieves and scoundrels!

[Wednesdays]

4. K&R

:kick:

[truedelphi]

7. Geithner just loves these CDS instruments.

He has stuck his neck out for them every step of the way.

So if you question the system of allowing for the CDS protocols, you are questioning Obama's number one or number two appointee.

And all I can say is, why do you hate America?