MONEY CULTURE

The Rise of the 'Empty Creditor'

They'd rather drive good companies into bankruptcy than save them. Why?

By Daniel Gross |
Apr 21, 2009 | Updated: 3:49  p.m. ET Apr 21, 2009

« Return to Article

Discuss

Member Comments

  • Posted By: tired and old @ 04/23/2009 11:36:36 AM

    GETTING RICH ON WALL STREET.

    1. GREED

    2. FRAUD

    3. LIES

  • Posted By: tired and old @ 04/23/2009 11:29:01 AM

    THIS SUMMER AUTO WORKERS WILL GET A NINE WEEK PAID VACATION AT TAX PAYER EXPENSE ------------------------------------- WILL YOU ?

  • Posted By: tired and old @ 04/23/2009 11:27:16 AM

    PREZ OBAMA IS SOFT.

    PREZ OBAMA WANTS TO KEEP BAILING OUT DETROIT AND THE BANKS.

    THE GOVERNMENT NOW TELLS US THAT RECOVERY IS HAPPENING.

    REALLY ?

    THIS PAST MONTH ! 640,000 MORE WORKERS LOST THEIR JOBS.

    HOME SALES ARE DOWN ANOTHER 3 %.

    CONSUMER GOODS ARE 50% HIGHER.

    CREDIT CARD COMPANIES ARE SCREWING AMERICANS WITH HIGHER INTEREST RATES AND HIDDEN FEES.

    PREZ OBAMA AND CONGRESS DOLES OUT TAX PAYER MONEY TO KEEP THE RICH ---- RICH.

    " WE THE PEOPLE..... " GET ANOTHER SCREW JOB.

    BUSINESS AS USUAL UNDER PREZ OBAMA.

  • Posted By: TommyTee @ 04/22/2009 12:29:23 PM

    <<You can't blame empty creditors for wanting to see companies in which they hold debt go bankrupt.>> Sure we can. Sure, some are buying insurance on investments. But many others of those credit default swaps are naked short bets. There is no investment other than the insurance pollicy (CDS) itself.

    If I bought an insurance policy on my neighbor's house hoping it would burn down, and did tangential things to limit water to the fire hydrant or sold the homeowner some less flame-retardant paint, I would be investigated by the fire marshall, and ultimately couldn't collect if the house went poof.

    But many big hedge funds do just that--they buy a naked credit default swap with no underlying basis for a company that is a bit wobbly. Then they make all sorts of tangential moves in the market that make the company look worse, hoping to drive it out of business.

    Anyone lobbying for less regulation of the derivatives markets are just trying to maintain the profitable status quo. Please don't blindly defend the CDS buyers--they would need to have legitimate, and morally forthright basis for this insurance.

    • Posted By: westdude @ 04/23/2009 11:06:53 AM

      I like your analogy Tommy and I agree with it. The one thing they never consider about CDS is that someone will still have to pay for it. Just like Katrina, when someone has to pay for the call for their insurance and the amount is just way too large, do you really think that the insurance/CDS company will be able to pay for it? Especially company like AIG that does tons of CDS without putting some of the money they earn through CDS back in the insurance pool and now they are going down. How do you think AIG is going to pay for the execution of the policy when they themselves don't even have the money to survive on their own?

  • Posted By: hunter349 @ 04/22/2009 2:44:04 PM

    @ Messiah: Look I know its easy to just look at the first layer of something and say that's bad or that's good. But that's why you're not the president. Obama is forcing them to do whats in their and the countries best interest. GM (as well as Ford and Chrysler) Make big money working with Exxon and other big oil companies to keep fuel efficient cars off the road. A quick look at Chevrolet's site shows their highest MPG standard car is the Chevy Cobalt XFE at 37 MPG highway. I used to have a 1991 Mazda Protege. It had a 36 MPG factory rating. That was made 18 years ago! There are kids who weren't even born when that car was made who can now drive. I feel for the workers at GM. They seem like good hard working people but the strain that these companies put on the rest of the country effect us all in high gas prices, high energy bills, taxes used to pay bailouts, pollution that effect fishermen's catches and the food you eat. Not to mention the constant profit percentage per car increases that they have been forcing us to eat for years. The US doesn't want to break up with GM but unless they make a drastic change we will be forced to find someone else.

    • Posted By: georgou @ 04/22/2009 10:42:34 PM

      Now that Ford owns Mazda (in part or wholly), don't expect that much MPG.

  • Posted By: TommyTee @ 04/22/2009 12:49:27 PM

    Chuckling at Messiah's post... It's subtle, but I'm guessing: Not a fan of your new president?

    How do you "force bankruptcy?" The alternative is nothing resembling capitalism--keeping the money fire hose trained on the automakers until they quit doing the same thing over and over again, expecting a different result... Yea, that'll work...

  • Posted By: TommyTee @ 04/22/2009 12:45:11 PM

    Sorry, meant to add--"You could't even buy the insurance policy on your neighbors home because of insurance regulations."

  • Posted By: The Messiah @ 04/22/2009 10:26:02 AM

    When ScumBama and the other criminals on Corruption Hill are done, their forced packaged bankruptcy for GM will decimate the entire U.S. auto industry, 6,000 vendor suppliers and 20 million U.S. jobs. This is an example of abuse of power by ScumBama and the other criminals that will cost America dearly. It's criminal and ScumBama should be hung for treason.

  • Posted By: BearDown85 @ 04/22/2009 10:09:16 AM

    It is true that the counterparty insuring the credit loss would act in its own economic interests. The key question is whether the counterparty can step into the shoes of the insured creditor in the negotiations before the event triggering counterparty's obligation to pay. It is possible that the counterparty's hands are tied until it pays the insured creditor. Another interesting question would be whether the insured creditor owes the counterparty a contractual duty to mitigate the losses that the counterparty will suffer. I don't know if Mr. Gross explored these issues in his reporting, but I would be interested in the answers. I think Mr. Gross has exposed some of the important undercurrents flowing through our financial markets and has helped us all understand the reasons for some of the decisions being made that affect all of us. I'm reasonably sure that credit default swaps are playing a significant role in the negotiations with the creditors of GM and Chrysler. I hope he continues his reporting on the role these financial instruments are playing and whether taxpayer bailout money is distorting the creditors' decisionmaking and ultimately putting taxpayers out of work.

  • Posted By: avecplaisir @ 04/22/2009 8:29:41 AM

    Sorry to burst the bubble of the biased media elites, but the empty creditor theory is, well, empty. At the end of the contract chain is a counterparty who WOULD suffer a loss and why wouldn't THAT creditor act in theri own best interest. Let's try reporting without filtering the "expertise" consulted for each article in favor of your agenda.

    • Posted By: cainpk @ 04/22/2009 10:09:00 AM

      Did you read the article? The author said that the creditors are acting in their own interest. The problem that has arisen is that in these companies that are falling behind on debts in the past restructured their loans and continued operation, now because of credit default swaps, the creditors are forcing companies that are having troubles into bankruptcy and liquidation not so that they can collect directly from the company but so that they can collect their insurance money. This is a win-win situation for the creditor because either way they get money, but it is a losing proposition for the insurance companies who suddenly have to pay out large sums of money to the creditors and for the companies that are behind on payments because they are being forced out of business. It is this imbalance that is reaking havoc with the system.

    • Posted By: cainpk @ 04/22/2009 10:03:39 AM

      Did you read the article? The author is saying that the creditor is acting in their own best interest, but those actions are now making a situation where companies that in the past would have restructured debt and then continued on past the troubles are now being forced to simply file for bankruptcy and liquidate so that the creditors can collect insurance money. It's a win-win situation for the creditor and losing proposition for the company that files for bankruptcy and the company that has to pay the insurance, and it is that inbalance that is causing so many problems.

  • Posted By: BearDown85 @ 04/22/2009 9:53:02 AM

    I agree that the counterparty suffering the loss would act in its own economic interests. However, the question is whether the counterparty has the contractual right to step into the shoes of the insured creditor before covering the insured loss. I would be interested if Mr. Gross explored this issue in his reporting. If not, it would be interesting to know the involvement of the counterparty prior to a bankruptcy and if the insured has a contractual duty to mitigate losses the counterparty may suffer.

Reply

Report Abuse

Enter comments if any for reporting abuse