An article in a major international business newspaper today is headlined: "Credit Insurance Hampers GM Restructuring." The article submits that hedge funds and other investors "stand to make billions of dollars on credit insurance contracts if General Motors declares bankruptcy" and that this is making it more difficult to reach a restructuring plan for General Motors.
It is reported that the prospects have "diminished" that holders of $27 billion in General Motors bonds will agreed to swap their debt for a 10 percent equity stake in General Motors by the June 1 deadline due to the involvement of credit default swaps. (Other parts of the agreement will give the U.S. government a 50 percent equity share, the United Auto Workers union healthcare fund 39 percent and existing shareholders 1 percent. ) Pursuant to the provisions of the credit default swaps, creditors will receive more in the event of a General Motors default than if they agree to a restructuring of General Motors' debt. According to the article, the Depository Trust & Clearing Corporation submits that creditors which hold $34 billion in credit default swaps will "make a net profit of $2.4bn if GM were to default."
The behavior of these General Motors' creditors would appear to be accordance with that of the "empty creditor" explored in the recently reviewed writings of University of Texas Law School Professor Henry T.C. Hu. Professor Hu asserts that the empty creditor is one that exhibits puzzling creditor behavior towards troubled debtors when credit default swaps and other products are involved. Professor Hu suggests that due to the use of credit default swaps and the like, the empty creditor may have a perverse incentive to fail to cooperate and cause the troubled firm's value to fall. Professor Hu explains that traditionally, the law assumes that creditors would seek to "keep solvent firms out of bankruptcy and to maximize their value."
Professor Hu's work on the "empty creditor" has been reviewed in the Wall Street Journal and Newsweek, and Business Week.Jordan E. Bublick, Miami, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
