I hate to say “I told you so” but… I told you so. The holders of the credit default swaps (CDS) have more to gain from the failure of the borrower than from accepting payments.
Bloomberg is reporting a strategy at Citigroup, Inc. to do just that. In one example, they can buy up Six Flags bonds at 20.5 cents on the dollar, pay a small premium to get the CDS and then collect the full face value of the bonds when Six Flags files for bankruptcy – which the CDS holder can be sure happens.
Normally, before a company goes into bankruptcy, they would meet with the debt holders to try to re-negotiate their debt. Debt holders will usually do this because they have more to gain from the company remaining in operation than otherwise. Sometimes, the company may even get them to exchange their debt for equity, provided there is a good business model that has the potential for future earnings.
Now, as I’ve described repeatedly, the CDS holders have more to gain from the bankruptcy because they will get their entire investment paid back, with interest, not from the company that issued the debt but from another company that issued the CDS – some company like, for example, AIG!
Speaking of AIG, there was very little coverage of the Senate Committee hearing Thursday (3/5/2009): “American International Group: Examining what went wrong, government intervention, and implications for future regulation.” It was a stunner! Bottom line? Senator Jim Bunning (R-KY) told the panelists that if they asked for another dime for AIG, “You will get the biggest ‘no’” ever heard. The entire committee was incredulous that Federal Reserve Vice Chairman Donald Kohn point-blank refused to tell them 1) who is benefiting from the AIG payouts on CDS and 2) how much more is it going to cost to bailout AIG.
Stand by, because home foreclosures are on the same course as Six Flags: homeowners attempting to re-negotiate their debt will find that somewhere in the background, a CDS holder has more to gain from the foreclosure because they will get their entire investment paid back, with interest, not from the homeowners but from some company that issue CDS – some company like, for example, AIG!
Comments
7 responses to “Many Investors Have More to Gain by Letting Your Mortgage or Company Fail”
The government owns most of the stock in AIG.
How do you think the government should run AIG?
I liked reading your January 17, 2009 “SOLVING THE FINANCIAL CRISIS: LOOKING BEYOND SIMPLE SOLUTIONS”
What do you think the government should do to increase the odds that small businesses and other businesses will not fire people and increase the odds they will hire people? The more people who are fired the more people who may be fired.
Unemployment rate is now at highest level since 1983 according to http://www.msnbc.msn.com/id/29538287
“Unemployment rate soars to 8.1 percent
Employers resort to even bigger layoffs as they scramble to survive”
I discuss my plan for dealing with the financial crisis on http://www.newgeography.com/users/kenstremsky.
Sincerely,
Ken Stremsky
You got so many points here, that’s why i love reading your post. Thank you so much!
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See what is being offered by major banks and the Government to assist delinquent homeowners
Excellent read, I just passed this onto a colleague who was doing a little research on that. And he actually bought me lunch because I found it for him smile So let me rephrase that.
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Hi, AndrewJPeterson,
These are important issues that don’t get enough attention. The Primary Dealers (about 17 banks that have a special relationship with the Federal Reserve Bank of New York) owe three times as many mortgage backed securities for trade settlement as what they own! In the latest reports, they show that they own about $39 billion of mortgage bonds; but that they failed to deliver about $91 billion! They have owed those $91 billion worth of bonds for settlement failures for at least a week. New numbers come out every Thursday and I post them to Twitter.
Thanks for writing and for your encouraging words,
Susanne
Follow me on Twitter: SusanneTrimbath
Hey mates, I’m amazed to know that impression. Thanks for letting us know that sounds of more to gain from the failure of the borrower than from accepting payments. Thanks! @ Felix Investment
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