2005 Bankruptcy Law exempts Credit Default Swaps and other derivatives from bankruptcy rules

http://www.ft.com/cms/s/0/85790440-a6c3-11dd-95be-000077b07658.html?nclick_check=1

The changes in the code expanded the scope and definition of financial transactions not covered by bankruptcy rules to include credit default swaps and mortgage repurchase agreements – products used widely by Lehman, Bear and AIG.

Lawyers said under the old rules, creditors of companies facing financial difficulties were wary of settling trades or seeking extra collateral because they knew such demands could precipitate a bankruptcy filing and potentially freeze their claims.

However, when the financial health of Bear, Lehman and AIG took a sharp turn for the worse this year, their trading counterparties – mainly hedge funds and other banks – were not deterred from seeking to settle their trades or forcing the three companies to put up more collateral.

Such pressure exacerbated the liquidity squeeze that ultimately forced the three companies to hoist the white flag. Bear was sold to JPMorgan in a cut-price deal in March, while Lehman filed for bankruptcy last month and AIG was rescued by a $120bn government loan.

Lawyers said the 2005 exemptions also could apply to non-financial companies, potentially complicating the bankruptcy process of any company that uses derivatives. Stephen Lubben, professor at Seton Hall University School of Law, said: “These provisions affect a non-financial firm, such as a car company or an airline, because they also engage in derivatives trading.”

http://www.ft.com/cms/s/0/85790440-a6c3-11dd-95be-000077b07658.html?nclick_check=1
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This is the article referenced in an earlier post. I thought it was an important point to understand so am posting it even though the article is old.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5204751

The law was written, specifically, by big banks so that they could up the ante on their little Ponzi schemes.

Credit Default Swaps aren't something that the little investor can buy.

we were all here warning of this at the time ..

And shame on all the Democrats, including Vice President Biden, who voted in favor of it. Caps need to be placed on interest rates and pronto!

Hell ... this economic collapse has been obvious for OVER eight years.

So I'm thinking creditors had "No Means of Relief" prior to this 2005 law.

Where did you hear that?

they were discussing what to do about all the bank failures they are predicting to come. And yes they mentioned some thing modeled off what Sweden was forced to do.

But they also talked about what got them to this point of massive melt down and the subject of credit default swaps came up. One of the speakers mentioned the "Credit Default Market" fell off sharply in 2005 when they quit writing them - not because they were forced to quit writing them. But because the market for them dried up.

Which leads me to believe creditors had absolutely "No Recourse" should the holding company (such as AIG) became insolvent.

You have to remember they changed the name from "Bond" to "Credit Default Swap" in order to avoid all regulation in the first place. These were a brand new product in an already unregulated environment

:kick: