Yes, derivatives are given special status.....they are not subject to the automatic stay that happens when a BK petition is filed. They can call on cash collateral after the petition is filed, thereby making a mockery of the seniority of other debt.
Don't know about their formal priority over senior secured debt, but in a financial firm, it won't matter because the amounts collateralized could easily exceed debt, or be structured to exceed debt or the collateral not protected by the stay might be a huge part of the assets, big enough to leave holders of senior debt holding an empty bag.
Serious systemic risk since this part of BK law essentially makes the security behind bonds worthless. How can they be rated rationally? How can the appropriate interest rate be determined?
Plus, no one really knows how much derivative exposure any firm really has, all of which makes senior debt very insecure. We do know, however, that the derivatives exposure is huge. If even 2 or 3 percent is able to use this favorable law during a crisis, well, it will be a SHTF moment.
Incredible.
The Yale article quoted by Golem is a sick joke; it acknowledges that the legal provision causes systemic risk, then creates a long winded, highly rationalized justification for it. The author must be angling for a juicy Wall Street job. |
