Call it the law of unintended consequences in action:
SAN FRANCISCO (MarketWatch) — The creation of a “car czar” to oversee the federal bailout of Detroit’s car makers might trigger what’s known as an event in the vast market for credit-default swaps, prompting holders of General Motors Corp. and Ford Motor Co. credit protection to demand payments from their counterparties, analysts said.
Such an event is also likely if a federal bailout falls flat and either company files for bankruptcy, as many investors fear.
(…)
It’s this appointment of a government administrator to oversee auto makers’ large expenditures and asset sales that has raised the possibility of a bankruptcy event for credit default swaps, said Banc of America Securities analyst Glen Taksler.
He noted 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.”
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.
And probably send all three of the companies into Chapter 11 in the process.
H/T: The Truth About Cars
December 10th, 2008 at 10:33 pm
[...] Below the Beltway holds out a little hope that the bailout will not succeed (see here). He also notes the bailout of homeowners seems to flopping (see here), and that a Car Czar could doom all the Big Three (see here). [...]