I wonder what impact the Bankruptcy “reform” legislation passed in 2006 (2007?) has on this issue of how a bankruptcy stay applies to derivative unwinds in the USA. The abstract of the article stated does not specifically mention the USA.

Given the proliferation of these swaps written as domiciled in offshore banking facilities (OBFs) the jurisdictional legal maze only adds to the overwhelming complexity at hand.

Full employment for securities lawyers. As much work as you can handle at $500 an hour. But incredibly tedious and repetitive. Basically assembly line work at $500 an hour.

I note that the paper referenced was published in by NBER in 2005. I’d like to read it.

Matt Dubuque

Bondholders can protect themselves with covenants restricting debtor activities. The thing is in the past several years bondholders have been willing to accept bonds with weak covenants issued by debtors with crappy balance sheets. Now they will pay the piper. There is no free song.

JMHO but derivatives have reduced shareholders from “owners” to mere claimants against a precarious revenue stream and undermined the notion of bondholder “priority.”
Long term investors are the losers as derivatives hollow out future value and coupled with leveraging the impact is exponential.

Re: Pimco’s Bill Gross said on Sunday that a Lehman Brother’s (LEH.N: Quote, Profile, Research, Stock Buzz) bankruptcy risks an “immediate tsunami” because of the unwinding of derivative and credit swap-related positions worldwide.

Talks to sell Lehman faltered Sunday, triggering concerns that the investment bank may be heading into bankruptcy by the end of the day and prompting banks to call an emergency trading session to unwind positions with the firm.

“It appears that Lehman will file for bankruptcy and the risk of an immediate tsunami is related to the unwind of derivative and swap-related positions worldwide in the dealer, hedge fund, and buyside universe,” Gross, the chief investment officer of Pacific Investment Management Co (Pimco), told Reuters. Pimco oversees more than $812 billion in assets.

Announce that the government is doing a $30 billion guarantee for Lehman like it did for Bear Stearns. In return, every company in the room agrees to a one-year industry-wide moratorium on bonuses and dividends, no exceptions.

Bankers “voluntarily” inflicting pain on themselves provides political cover for one last federal bailout, and there’s also cover for the weaker players to cut costs without stigma and without fear of their talent being poached.

Why would the stronger players agree to it? Because their stock prices might actually go up sharply. It could be the mother of short-squeeze rallies, the long awaited market bottom, and unlike July this one might actually stick because there’s no quick expiry after a few weeks.

Bring Barney Frank into the room at a critical juncture to play the role of unhinged “bad cop”, and announce that the Administration is working closely with him to explore some new interesting legislation…. ba da boom!

But anyone buying Lb was probably wary of their inherent inability to manage risk…or the desks shall we say…they were all talk no action – bring back Madelyn (former head of risk – demoted for being too diligent)(not in so many words).

That is why they re merging, to help out the little guy