Wednesday, April 29, 2009

The Debts of the Spenders: Not Enough Bankruptcy Filings in CDS

Here is another legal update on CDS trading. This time the focus is on potential ISDA changes. Like the prior post the slide is from a DE Shaw presentation.* I am going to focus on the second pointer which is the Bankruptcy clause credit event.

The US govt is hell bent on preventing another Lehman or FNM/FRE situation from appearing - the failure of a "too big to fail institution" is a deflationary nightmare for Bernanke and co.

Side note:

While traders are focused on speed and lighting fast execution, attorneys are used to moving in slower circles. Counselors routinely argue and file motions for cases that are 10, 15, even 20 years old. So it comes as no surprise that MOST bankruptcy attorneys are a bit out of the loop here (only in big NYC, Chicago, or London firms see this kind of work and even then it is highly specialized). And have been scrambling to be kept appraised of CDS.

Until a few months ago, most bankruptcy counsel have never even heard of CDS. I know I never did in law school. But now . . they are billing thousands of hours at astronomical rates. It may seem unfair to those readers who are not lawyers but those men and women deserve every single penny. The case law has not even been settled (there isn't even any substantive case law and what scant details do exist are occluded by the Treasury, FDIC, or Fed) and statutory actions are a bit grey right now. I cannot even begin to imagine the amount of hours spent poring through Lexis or Westlaw (proprietary legal databases that are the equivalent of Reuters and Bloomberg terminals for lawyers).

So it's all about publishing legal memos from esteemed white shoe firms (like this DE Shaw slide). However, w/the way this administration is making stuff up EVERY SINGLE DAY, the potential exists for the memo content to become obsolete or even irrelevant w/in days. Still, it's nice to know that some lawyers are benefitting from this fiscal stimulus.

*Disclosure - I am not, nor have I ever been, a DE Shaw counselor or employed by them in any capacity.


Blog Archive