Carservatorship without credit event please

(The devil is on the details,in this case how do you not trigger a Lehman style explosion in CDSs. Remember the narrative fantasy that Lehman was contained because the 400 billion in notional value was reduced to 8 billion after netting? DTCC says General Motors and GMAC have a notional value of 118 billion but what puts icing on this cake is their presence in synthetic CDOs that are edging towards the abyss. - AM)

WSJ
December 11, 2008
By JEFFREY MCCRACKEN and ELIZABETH WILLIAMSON
Intense lobbying by banks and bankruptcy experts softened a key provision in the auto-bailout bill that would require government loans be repaid ahead of banks and other lenders. But the current language leaves unclear just who would collect first in the event of a bankruptcy filing -- taxpayers or existing creditors.

The banks' prime concern centered on a plan to make the government's $14 billion in rescue loans senior to other loans. They argued that this clause violated the Fifth Amendment of the Constitution, which prohibits the taking of private property without "just compensation."

Controversy erupted after a draft bill Monday stated plainly that the government loans would be "senior and prior to all obligations, liabilities, and debts of any such holding company or company that controls a majority stake in the eligible automobile manufacturer."

Historically, the only way a secured lender can be forced to take a backseat to another lender is in bankruptcy court, where a judge hears from the secured lenders and determines whether those creditors are protected with additional collateral or other measures.

"It really sounds like a clear violation of the taking clause in the Constitution, to put the government ahead of all the other lenders. To go this route is a treacherous path riddled with all sorts of constitutional issues," said Don Workman, head of the restructuring practice at the law firm of Baker Hostetler.

It is still unclear what the practical effects of this language may be. Potentially, that could place the government behind banks but ahead of bondholders in repayment, say turnaround experts.

Lenders said if left unresolved, the subordination question could make banks and others even less willing to lend to troubled companies, for fear the government could intervene in more situations.

But the new compromise language may also anger some policymakers, who have demanded the government and taxpayers be paid back firs.

(Policy makers better be coordinating with DTCC because there is a Sword of Damocles here-)

Posted by FT Alphaville on Dec 11 17:58:

From a CDS perspective, the language used in any potential bailout will be crucial. If senior bondholders are subordinated to the government, then it could constitute a restructuring credit event.