Chrysler files bankruptcy. Let’s be clear about who is responsible here. It is the banks, bondholders, and Wall St. that created the derivatives and Credit Default Swap (CDS) monster. Derivatives have already created the current economic depression (Bear Stearns, Lehman, Merrill, etc). Now the presence of CDS’s distorts the normal workings of a market economy and prevents the proper functioning of institutions. In times past, the threat of bankruptcy (itself a centuries-old institution) worked to make all stakeholders: labor, capital, and management work together through difficult and unforeseen times. Now, no longer. Now capital demands full compensation with no risk. It demands sacrifice by all others, but not itself. It kills the goose in order to get a larger share.
THE DEAL PIPELINE SNEAK PEEK: Credit default swaps are complicating efforts to work out bank, auto and other restructurings outside of bankruptcy.
As the holders of billions in credit default swaps against a bankruptcy of General Motors Corp. and Chrysler LLC, the automakers’ lenders have so far rejected the government negotiators’ demands to greatly reduce their claims on the car companies.
Emboldened by credit default swaps, bondholders in other restructurings have resisted efforts to reduce the amount of money they are owed or refused to accept offers to swap debt for equity in hopes of at least sweetening the deal after a bankruptcy filing. They also are fighting to reserve their right to CDS payoffs, bankruptcy experts and analysts said.
The prevalence of credit default swaps has been blamed for at least worsening the financial crisis. Now they are complicating efforts to clean up balance sheets, ease debt burdens and unwind the tangle of financial obligations between financial firms and their counterparties — critical steps in reviving the economy.