Holy cow. Credit Default Counterparties have 1st claim on assets?

[dkf]

How the Rules Were Rigged
03.06.09 -- 12:22PM
By Josh Marshall

I'm sure the knowledgeable people already know this. But it turns out that one of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don't just go to the head of the line. They got to skip the line entirely. As the Financial Times noted last fall, "the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company's assets until a court decides how to apportion them among creditors." As the article notes, ironically, this provision which Wall Street pushed for and got to protect investment banks actually ended up hastening the collapse of Lehman and Bear Stearns last year.

Down in the article there are also the mentions of the entertainingly named "International Swaps and Derivatives Association", one of the lobbies that helped get the change in place.

Along these lines, TPM Reader GG sent in this last night ...

Respectfully, you guys are totally misunderstanding something crucial in the AIG bailout: Derivatives claims are not stayed in bankruptcy. (Yet another brilliant innovation from the 2005 bankruptcy reform legislation.)

If AIG were to go down, derivatives counterparties would be able to seize cash/collateral while other creditors and claimants would have to stand by and wait. Depending on how aggressive the insurance regulators in the hundreds of jurisdictions AIG operates have been, the subsidiaries might or might not have enough cash to stay afloat. If policyholders at AIG and other insurance companies started to cancel/cash in policies, there would definitely not be enough cash to pay them. Insurers would be forced to liquidate portfolios of equities and bonds into a collapsing market.

http://www.talkingpointsmemo.com/archives/2009/03/im_sure_the_knowledgeable_people.php

[MineralMan]

1. Ah...thanks again to Bushco and the GOOPers.

Assholes!

[dkf]

3. I've been reading up on Credit Default Swaps and I had no clue this

was how it worked.

I'm absolutely flabbergasted.

[MineralMan]

8. This is what happens when you have a GOOP congress

and a GOOP President. They do whatever the money guys want them to do...no questions asked.

They screwed us all for their own benefit. Heads should roll all over the place with regard to these shenanigans. They won't, of course, because the shock of what was done to us would be almost impossible to bear.

Essentially, it'll all be covered up in an attempt to cushion the blow.

[depakid]

15. Sorry- for that you can thank Harry Reid- who crossed over and voted for it

with a number of other DINO's.

[Trajan]

18. Aye Mate ...

And one in particular sits in the Vice President's chair; that affable personality we know as Joe Biden ....

Joe ? ... We love you, but you fucked up royally on that one ...

[bvar22]

34. You can also thank Joe Biden.....

...and the "Centrist" Democrats.

[DJ13]

2. That might explain why the government cant allow AIG to bankrupt

:shrug:

[dkf]

4. How many other institutions are in this boat?

Incredible.

[JCMach1]

5. That and the 100's of billions of credit default swaps on real estate still outstanding

to European banks... Probably enough to take out most of the banking industry in Europe.

[AllentownJake]

6. Not surprising

That bill was written by special interest. It was bought and paid for and both political parties were involved in allowing that to happen.

I wouldn't be surprised if there was a hidden provision that allowed for debts to be passed to children and indebtured servitude as sex slaves in Saudi Arabia.

[dkf]

7. Can we simply repeal that thing?

I think it encouraged some very bad behavior.

[AllentownJake]

9. The bad behavior was already there

What it did was put into law an ability for those who had committed part of the bad behavior to not have to suffer the full consequences.

Making it easier for people to file for bankruptcy right now would be a mix bag. It could cause these financial firms to all fail overnight.

[leftstreet]

10. K&R Thanks for finding this

Interesting snip

Additionally, naming AIG's counterparties without knowing/naming those counterparties' counterparties and clients would be at best useless, and very likely dangerous. Let's say Geithner acknowledges that Big French Bank is a significant AIG counterparty. (Likely, but I have no direct knowledge.) BFB then issues a statement confirming this, but stating it was structuring deals for its clients, who bear all the risk on the deals, and who it can't name due to confidentiality clauses.

Since everyone knows BFB specialized in setting up derivatives transactions for state-affiliated banks in Central and Eastern Europe, these already wobbly institutions start to face runs. In some cases this leads to actual riots in the streets, especially since the governments there don't have the reserves to help out. If you're Tim Geithner, do you risk it? Or do you grit your teeth and let a bunch of senators call you a scumbag for a few more hours?

When I read these articles I can't help thinking how contrived this all seems.

Hey, Central and Eastern Europe - guess it sucks to be you.

What a mess.

[dkf]

11. I'm beginning to think this was all ginned up.

Certain people were realizing there wasn't much more to be made on the upside and created a system where they could make tons of money on the downside.

They realized AIG was mispricing credit default swaps and bought them enmass. They get rid of the uptick rule which used to keep shorts from jamming the market down. Then they get crony Paulson to help out his buds by putting AIG on the American Taxpayer.

This is really making me mad.

[leftstreet]

12. Good way to put it

making "tons of money on the downside."

That's exactly what it was.

[AllentownJake]

20. I'm not

The Iraq war was ginned up to boost Bush's friend's profits. Haliburton went from the 27th largest corporation to the 9th over the time of his Presidency.

If you take a look at the industries that are most being effected outside of banking (who will be more than fine bail out or no bailout) its alot of manufacturing. You know the type of industries that have labor unions.

Its so fucking apparent what these asshats did...and they planned to do. The only problem is their little bomb went off a wee bit too soon. They were hoping it would go off during Barack Obama's (or whatever democrat won the primary) Presidency, not before it.

[lostnfound]

31. Exactly. Created a system to make tons of money on the downside.

Knowing about this, and knowing what to do about it, are two different things.

[KoKo]

36. You aren't alone... Some of the new financial blogs that have started up have had

posters speaking about the same thing. You have to read those blogs and the comments sections because Bloomberg, CNBC, Fox Financial and MSNBC/CNN are NOT going to talk about this. That the MSM keeps talking about "Toxic Assets" and "Subprime" is the clue that there's much more under the surface that they don't want us to know.

Santelli's big rant and the fact that Cramer's Mad Money and that idiotic show "Fast Money" are all pointing to everything but what is "underneath" is the clue. We sort of learned that from years of watching stolen elections and covered up Invasions and Torture.

Always look in the direction they aren't pointing in to find out what the "Powers that Be" are up too.

This whole thing is as big a scam put off on American and Worldwide Taxpayers as the Iraq Invasion was sold to those who were panicked into going along with the "Mushroom Clouds and WMD" that were imminent if we didn't act. That "Bankruptcy Bill" crap already anticipated what was going to come and Biden, Edwards and Hillary all voted for it...so did most of our other Dems when the final bill was voted on.

[dysfunctional press]

13. why can't all the credit-default swaps be declared null-and-void...?

bascally to say- 'all bets are off' and everyone gets their initial investment back.

[AllentownJake]

14. It would create DOW 2000 overnight

If the government went backwards and null and voided valid legal contracts. The effect on World Markets would be devastating.

I'm not fully against it but there would be a consequence.

[dysfunctional press]

16. so where is the reportedly hundreds of trillions of dollars to honor them all going to come from?

:shrug:

or won't there be any consequences to that side of the equation?

[dkf]

17. The amounts owed could take this country down.

This situation is making me very nervous.

[AllentownJake]

19. It's called a Catch 22

You can't make them null and void because it would wipe out the economy. You can't honor them because if you do it will wipe out the economy.

Translation: We are fucked.

In the world of Star Trek they call this the Kobayashi Maru

http://en.wikipedia.org/wiki/Kobayashi_Maru

[mediaman007]

21. I don't know where the money will come from, but those derivatives

have pension funds riding on them. Those banks risked pension fund money on the credit default swaps. Could have been your Social Security money too!

[AllentownJake]

22. The 401(k)

Was the greatest scam ever perpetuated on the American populace. Thank God, Bush was no Reagan (communication wise) or the evil sons of a bitches might have gotten their hands on that too.

There was a whole lot of money being saved for retirement and those greedy sons of a bitches wanted to get their hands on it.

[girl gone mad]

25. Which is exactly why the contracts have to be destroyed.

The counterparties were well aware of the risk of buying unsecured insurance policies. They aren't innocent victims. They do not deserve to be made whole by the US taxpayer any more than any other bad investor.

[dkf]

27. Exactly.

Credit Default Swaps should have gone down as fraudulent insurance policies. Instead they land up on the taxpayers plate?

Dylan Rattigan has been hitting hard on this. Thank goodness SOMEONE on CNBC is getting it right.

[mediaman007]

39. That's true! This is where people go to jail.

I would be that a lot of moderate risk funds are invested here. The agents who put those funds at risk should be headed to federal penitentiaries.

The truth will come out. Attorneys will be very busy.

[dysfunctional press]

29. that's one more reason why it should be 'all bets are OFF', and the investments returned...

if you can't pay everyone, it's not right to pay anyone. the contracts should be declared null and void.

even if the outcome is very bad- it seems like the one that makes the most sense.

unless someone can explain what the results would be and why another option would be preferable...?

[mediaman007]

44. I somewhat agree. AIG should repay the insurance premiums to

the investors. There is no way they should collect money on contracts that they did not own.

[girl gone mad]

23. I'm so glad that this is finally getting real coverage in the political blogs..

and not just the financial blogs.

More people need to know what's been happening.

[dkf]

24. What is a good financial blog?

I'm stymied that I've only just learned about this.

[girl gone mad]

33. There are so many..

a few I read on a regular basis are:

http://www.nakedcapitalism.com/">Naked Capitalism
http://abnormalreturns.com/">Abnormal Returns
http://bigpicture.typepad.com">The Big Picture
http://baselinescenario.com">The Baseline Scenario
http://www.prospect.org/csnc/blogs/beat_the_press">Beat The Press
http://calculatedrisk.blogspot.com">Calculated Risk
http://www.portfolio.com/views/blogs/market-movers">Felix Salmon: Market Movers
http://ftalphaville.ft.com/blog/">FT Alphaville
http://globaleconomicanalysis.blogspot.com/">Global Economic Analysis
http://www.marginalrevolution.com/marginalrevolution">Marginal Revolution
http://krugman.blogs.nytimes.com">Paul Krugman's blog<
http://www.rgemonitor.com/blog/roubini">Nouriel Roubini's RGE Monitor
http://blogs.ft.com/maverecon/">Willem Buiter

[dkf]

35. Great list!

I bookmarked them all for reading.

Thanks.

[kiranon]

26. Need to find out which Congressperson(s) put this provision in the bill

and throw them out of office in the next election. This is beyond anything that is justifiable financially.

[Gregorian]

28. Semi OT-- Everyone has to listen to this podcast!

This is an hour long radio show with Max Keiser. I can hardly begin to tell you how important this is to hear all the way through.

http://www.karmabanqueradio.com/podcast/tam070309.mp3

Basically, the entire crash was engineered. He talks about how our credit card interest rates stay high, our savings rates are low, and bailing out is the same as paying money to the criminals. He is saying it's still going to crash fully. And it has only begun. And the way we should have handled it was to tell the banks to fail.

I think this is a super important thing to hear, even if it takes an hour.

[EFerrari]

30. I'll trade ya! Robert Reich is on tonight at 8pm on LinkTv.

I saw it last night and he was clear and impressive. His book was "SuperCapitalism" but there's no knowledge of the work needed to watch his presentation.

:hi:

[Gregorian]

38. Cool. Thanks for the heads up.

By the way, my link is a podcast. It aired this morning.

I'm guessing you saw the Oracle. I've only seen the Oracle once. It's like a gen X McLaughlin group with common sense and humor.

Alright, Linktv it is.

[slipslidingaway]

32. K&R glad to see this finally get some attention n/t

[earth mom]

37. K & R & Bookmarked. nt

[KoKo]

40. ....

[acmavm]

41. Without the blessing and complicity of the dems in Washington, this

couldn't happen.

They vote according to their loyalties. And its apparent where their loyalties lie.

[melm00se]

42. I am not sure that this is 100% accurate

During a bankruptcy proceeding, an automatic stay goes into place preventing any further collections activities (http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter11.html#stay) which would include seizure of assets by secured creditors.

Of course a creditor can file for a lift of stay but there are specific reasons under which that can be granted.

(please note I am not an attorney and I would be interested to hear the opinion of an attorney who specializes in this area of law)

[screembloodymurder]

43. JHC, this makes Madoff's crimes look like petty theft.

The law was changed after-the-fact. Let's change it again.