Bankruptcy

Let's Make It Perfectly Clear About GM

By Bob Lawless

In a post yesterday, Lubben referred to the role credit default swaps are playing in the GM, but let's make sure no one missed the point. So far, everyone seems to have missed a major point, and I think it may have played a role in Chrysler's failed attempt to stay out of bankruptcy court. I've been meaning to write up an expanded post on the topic, but Andrew Leonard over at Salon's How the World Works does a much better job than I would have done.

Here is the short version: GM's bondholders may make more money by forcing the company into bankruptcy with a lower payout than accepting a restructuring with a higher payout. Leonard is reporting on a recent article in the Financial Times. Read Leonard's post and the FT article. Then read Lubben's scholarly article that explains how credit default swaps work and how they can create perverse incentives in bankruptcy court.

Full post as published by Credit Slips on May 12, 2009 (boomark / email).