Derivatives Pose New Wrinkle in Lehman Case(derivative holders exempt from mandatory stay)

NY Sun ^ | 09/25/08 | JULIE SATOW

[TigerLikesRooster]

Derivatives Pose New Wrinkle in Lehman Case

'A Huge Amount of Uncertainty'

By JULIE SATOW, Staff Reporter of the Sun | September 25, 2008

http://www.nysun.com/business/derivatives-pose-new-wrinkle-in-lehman-case/86595/

Bankruptcy lawyers and law professors are preparing for a journey into uncharted territory as the credit default swaps market gets dragged into the Lehman Brothers bankruptcy proceeding.

"The courts have dealt with credit default swaps very infrequently, and certainly not at the scale they are now out there," a lawyer at Washington, D.C.-based Caplin & Drysdale, James Wehner, said. "We have a new law and a new financial phenomenon, so there is a lot of uncertainty."

In recent weeks, regulators and the financial press have zeroed in on credit default swaps, a type of private contract that insures a bond in case of default. As of the first quarter of this year, more than $16 trillion worth of bonds were covered by credit default swaps, according to the Office of the Comptroller of the Currency. The trade group the International Swaps and Derivatives Association places that number much higher, at $62 trillion, and estimates that about one-third of the credit default swaps contracts lack collateral, that is, the issuers of the contracts failed to set aside assets in case the bonds default. Concern yesterday that a $700 billion federal bailout may not pass Congress and worry over the health of the financial industry sent the cost of protecting Morgan Stanley's and Wachovia's bonds from defaults, or their credit default swap rates, soaring.

Meanwhile, two of the largest players in the credit default swaps market, American International Group and Lehman, issued billions of dollars of these insurance contracts over the past several years, and also issued billions of dollars in bonds on which other firms had issued credit default swaps.

[TigerLikesRooster]

Ping!

[SE Mom]

“Most of these exotic financial derivative products are exempt from the bankruptcy laws, and this is creating a huge amount of uncertainty,” a professor of law at the University of Texas, Jay Westbrook, said. “In bankruptcy, there is a freeze, an automatic stay, creating an element of order and control, even transparency. That isn’t true with these financial assets.”
....
A professor of corporate law at the University of Pennsylvania Law School, David Skeel, who specializes in derivatives, said he is fielding calls from lawyers at major firms confused as to how to handle these issues. “I just keep telling them that I myself am still trying to figure it out,” Mr. Skeel said
....
We don’t know how deep this goes, which hedge funds have big stakes in credit default swaps, but it is certain this will be the next thing we will have to contend with,” Mr. Skeel said. “A hedge fund is going to pose all these same nuclear problems as we are seeing with Lehman, and there won’t be much the federal government can do about it. At least with investment banks the federal government was in a position to respond.”

[ikka]

As of the first quarter of this year, more than $16 trillion worth of bonds were covered by credit default swaps, according to the Office of the Comptroller of the Currency. The trade group the International Swaps and Derivatives Association places that number much higher, at $62 trillion, and estimates that about one-third of the credit default swaps contracts lack collateral

In other words, $700 B isn't even going to begin to cut it.

[WayneS]

Derivatives? Why that’s... that’s CALCULUS!

And all this time I thought accountants used simple arithmetic.

;^)

[TigerLikesRooster]

Paulson is hoping that, with additional injection of $700billion, people will cheer up and go out partying again, bidding up housing prices, derivatives, and stocks.

I think he can do better by buying up $7billion worth of prozac and Viagra, and dropping them from Bernake's helicopters.:-)

[TigerLikesRooster]

In 21st century, there is a ‘new derivatives.’ It is not useful for studying physics, but is supposed to make you rich. For a while.:-)

[RSmithOpt]

The level of greed and corruption we are just now seeing in this 'new' (Greenspan's child) economy of trillions of dollars of loans with no collateral to back them up whatsoever speaks in of itself as to the same levels of ignorance, deceit and plain stupidity.

Thank you United States Congress.

[RSmithOpt]

Yup...a bunch of neutrinos getting quarked again.

[GOPJ]

“Most of these exotic financial derivative products are exempt from the bankruptcy laws, and this is creating a huge amount of uncertainty,” a professor of law at the University of Texas, Jay Westbrook...

How big were the donations to Dodd and Obama to get this exemption passed?

[SauronOfMordor]

Paulson is hoping that, with additional injection of $700billion, people will cheer up and go out partying again, bidding up housing prices, derivatives, and stocks.

If we bail them out this time, some smart boy will figure out a new scam tomorrow. Eventually, we will have a crisis that is beyond the ability of the American taxpayer to bail out.

If the derivatives smart boys don't get SERIOUSLY burned by this, to the point where they will BEAT TO DEATH the next smart boy to suggest trying a new derivatives scam, we will ENSURE a depression.

[TigerLikesRooster]

I think these people should treated as severely as those Jihadis who crashed jumbo jets into WTC.

[reformedliberal]

I have been saying this since the 80s. Every arcane, boutique bit of financial alchemy needs to be individually vetted and, if the least bit wonky, banned. Eventually, there will be a huge list of types of *investments* that cannot even be considered.

Hedgers already use higher math skills to structure their various bets in the markets. No way to stop that, I suppose. I once knew a genius who did the same thing at the craps table.Something about placing lots and lots of different bets all over the board. He won for awhile and then he lost a lot. He was finally reduced to teaming up with another genius and they would *hedge* their table bets by having the shooter distract everyone while the other guy swept up various piles of chips placed in odd spots. I think this is called stealing. I think that the main gambler eventually just disappeared, AFAIK.

Yesterday, I saw an interview with a hedge fund manager on FBN. He said that many hedge funds saw this coming and have been raising large amounts of cash in order to buy in when the fire sale is held. Again, I suppose this is not only legal, but their cash will be welcomed. They will not go down and no one will be discouraged, except the small investor who has been their main prey.

[AndyJackson]

Most of these exotic financial derivative products are exempt from the bankruptcy laws

How do you do that? Next pass a law suspending gravity.

[AndyJackson]

There is another simple mechanism, which is that all these derivatives are contracts, and there is an old contract equity principle called rescission for frustration of purpose. None of these instruments, I presume, forsaw the total meltdown of the global fiancial system, which collectively they will have brought about. Under equity law, declare them void, rescinded, and then try to equitably settle the distribution of assets, if any.

[Liz]

The level of greed and corruption we are just now seeing in this 'new' (Greenspan's child) economy of trillions of dollars of loans with no collateral to back them up whatsoever speaks in of itself as to the same levels of ignorance, deceit and plain stupidity. Thank you United States Congress.

[BikerJoe]

Derivatives? Why that’s... that’s CALCULUS! And all this time I thought accountants used simple arithmetic.

I'm beginning to think these derivatives are hyper-dimensional. (or maybe hyper-delusional???)

[RSmithOpt]

You got it! Weaken the US economy intentionally, steal from the taxpayer in the meantime and fund socialist organizations like ACORN and LA RAZA to wipe out capitalism and the great nation, PERIOD!!

[Liz]

TAXPAYERS WANT TO HEAR POLITICIANS SAY (1) THEY WILL REPLACE REGULATORY LAWS, (2) throw out political correctness, AND (3) WILL NOT ALLOW ILLEGALS AND OTHER MARGINALS TO PROFIT FROM OUR ECONOMIC SYSTEM.

THE ROOT OF THE PROBLEM: Congress enabled this financial disaster. Sap-happy liberal Congressmen threatened banks for "red-lining," .......when banks were simply doing a lender's job to qualify people for mortgages.

This is the political correctness atrocity at work. It would have been too "judgemental" to tell marginal people they could not afford to buy a house beyond their means.

Political correctness is the sword that slew the economic dragon.

Many of the laws requiring government oversight of the market written after the last great market crash-----in 1929---- were eliminated during the Clinton administration---one of many ignorant moves by the self-absorbed "tolerant and compassionate" liberal Clintons.

It's not beyond reason to conclude that the mortgage/market debacle is the consequences of (1) moral relativity----and (2) disestablimentarianism (the deranged obsession with tearing down the foundation of Western Civilization).

Anything remotely connected to moral absolutes of right and wrong smacks of "religion" to disturbed religion-hating liberals.....and has to be destroyed.