  Salvadordelmundo Member Username: Salvadordelmundo Post Number: 141 Registered: 04-2006 |
A frightening but plausible scenario: Darth Wall Street Thwarting Debtors With Credit Swaps Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt... Ford, the only one of the so-called Big Three U.S. automakers to avoid taking federal bailout funds, may run up against basis traders as it seeks to restructure its debt. The Dearborn, Michigan-based car company plans to offer cash and shares to retire as much as $10.4 billion in debt, according to a U.S. regulatory filing yesterday. It may be “difficult” for Ford to do an exchange, in part because of investors with basis trades, said Rod Lache, an analyst at Deutsche Bank in New York, commenting last month before the restructuring was announced. The parent and its Ford Motor Credit finance arm had a net $8.1 billion credit-default swaps outstanding, versus about $54 billion in bonds, according to data compiled by Bloomberg and the Depository Trust & Clearing Corp., which runs a central credit derivatives registry. This might sound a bit arcane, but the premise is fairly simple - Ford wants to restructure its debt. It wants to buy back its own debt from people by trading it for Ford stock, along with some money. By doing this, Ford "retires" the debt, and can remove the obligations from its books. However - with all these negative-basis traders out there - Ford might not be able to make that swap at a reasonable price. It would be unable to restructure the debt, and may have to resort to the bankruptcy process in order to make that happen, despite its relative financial health compared to GM and Chrysler. Ford Motor Credit probably thought it was being clever when it got into the credit derivative market to begin with, but that may have been a foolish error. In this case, the "basis" in the negative basis trade comes from the spread between these credit default swaps and the bond price (as I understand it - it would be the CDS spread minus the bond spread - that equals the CDS basis). So, the negative basis traders are able to cash in once Ford starts buying back some of the bond debt, because once they short the CDS instrument, the CDS acts like an insurance policy, and the bond can be sold back to Ford at par value. The logic behind all that is convoluted, but the end result is that Ford may have screwed itself by issuing these credit default swaps. What are the best ways out of this trap? Appeal to the government to set up a "facility" to grab back some of these CDS contracts? That wouldn't technically be the same thing as getting a bunch of bailout money, but it would still look fairly bad. Bankruptcy is clearly something Ford wants to avoid, but if the economic slump continues for too long, the service obligations on those outstanding bonds might cause problems anyway. | ||
Novine Member Username: Novine Post Number: 1188 Registered: 07-2007 |
This is my big problem with "Wall Street" these days. How much money in the system is tied up in various schemes that are really nothing more than legalized gambling? As far as I can tell, most of what's destroying the financial markets has more in common with what the gambling houses in Las Vegas offer in terms of betting for and against the spread than in the real world financials of actual companies. | ||
East_detroit Member Username: East_detroit Post Number: 2021 Registered: 11-2003 |
Yes, Wall Street gets upset when a company such as Sears makes a profit, but not as much profit as Wall Street wanted. So, then they call for Sears to go under, people read it, are afraid to buy products there and then it goes under. Wall Street is destroying America (well, that and partisanship). | ||
Salvadordelmundo Member Username: Salvadordelmundo Post Number: 142 Registered: 04-2006 |
It is pretty similar to gambling. But Ford has to blame itself for some of this particular mess - why'd they issue billions of dollars of credit default swaps in the first place? What are the NAMES of the Ford officials who allowed this to happen? |
