Speaking at Crowell & Moring LLPs Credit Default Swaps conference on Thursday, Douglas G. Baird, a professor of law at the University of Chicago, talked about the somewhat problematic nature of the derivatives.
"The big risk with credit default swaps is the big difference between the party that holds the risk and the party with control of the underlying asset," Baird said.
Continue reading below
"If you come to a bank and tell them you're going to have to file
bankruptcy tomorrow if you don't get a waiver, previously they would
say, 'Let's work something out.'
"Now they aren't holding the risk; the issuer of the credit default
swaps is," he continued. "So you're telling the bank that if they don't
give you the waiver, they'll be paid off in full right away and never
have to talk to you again."
Baird continued, saying that the situation hasn't reached that point
because issuers are there helping to keep the bondholders in check,
but that it is a real concern. - George White
See Crowell & Moring LLPs Credit Default Swaps conference agenda
See more Dealscape posts on the CDS conference
