Bank nationalizations may not trigger credit-default swaps

January 22, 2009 by · Leave a Comment
Filed under: Opinion 

This may be true but what is being not said is that anyone who is nationalizing that bank will have to take over their own credit-default swap exposure as well and with the BIS (Bank of International Settlements) reporting there is over $500 trillion dollars of this paper running around, that would be quite a large amount of liability exposure to back.  These banks are insolvent in my eyes because of their bad decisions and they should go under and have have their assets sold to a prudent bank.  This is the way of the markets are we should let it take its course.

News:

Governments would need to take over all the assets of a bank and take charge of daily operations for a nationalization to trigger payouts on credit-default swaps, according to Bank of America Corp. analysts.

Simple nationalization wouldn’t be enough to settle the derivatives, which protect investors against a company defaulting on debt repayments, New York-based strategist Glen Taksler wrote in a note today. A collapse in share prices of New York-based Citigroup Inc. and Royal Bank of Scotland Group Plc is stoking speculation the U.S. and U.K. will be forced to take full ownership of some financial institutions.

“It’s worth noting the high threshold that would be required for bank nationalization to trigger credit-default swaps,” New York-based Taksler wrote in the note. “Simply taking a substantial ownership stake through equity is not enough.”

Events last year provide a guide to what may have to happen to trigger payouts on the contracts, Taksler wrote.

In the U.K., the nationalization of Northern Rock Plc in February 2008, which had the first run on a British lender in more than a century, didn’t prompt payments on credit-default swaps. This was because the government took over the bank’s equity and not its debt, agreed to manage it at arm’s-length and stated the institution was solvent, the note said.

A statement that a lender is insolvent may be required to start the process of paying out on default-swap contracts, he said.

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