A boom in the use of derivatives is giving creditors strong incentives to push troubled companies into bankruptcy rather than help rescue them, according to new research and industry experts.
A study by academics Henry Hu and Bernard Black concludes that, thanks to explosive growth in credit derivatives, debt-holders such as banks and hedge funds have often more to gain if companies fail than if they survive. The study suggests this development could endanger the stability of the financial system.
The findings highlight a crucial problem in corporate restructuring when more and more companies are facing financial difficulties as a result of the credit crunch and US economic slowdown. According to the research and industry practitioners, creditors have a strong interest in voting against a restructuring plan if they have bought credit or loan default swaps, which trigger payments when a company fails.
“Investors now accumulate positions in a company by targeting layers of debt or multiple layers of debt,” said Michael Reilly of the financing restructuring practice at Bingham McCutchen.
What does this mean for you in Sarasota?
Be smart, bankruptcy isn’t for everyone. Contact a bankruptcy attorney in Sarasota that can help you understand your options.
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Unfortunately the wave of corporate bankruptcies in the US will be far exceeded by personal bankruptcy. The present regime in Washington anticipating this outcome enacted legislation in October 2005 which basically prevents one from going bankrupt. Most claims are not extinguished by bankrupcy. Sure they can stiff their friends and relatives but not the IRS, banks, credit card companies and others making anyone in this precarious position a slave for life.