Credit default swaps can create perverse incentives.

The beneficiary of a credit default swap on a company's debt may get a huge payoff from the issuer of the CDS if the covered company defaults on its debt.  It is reported that CDS holders of Lyondellbasell are trying to force it into bankruptcy for just that reason.  The value of CDSs outstanding on the debt of a big company like GM can be much larger that the face amount of the debt because one does not have to own the debt to enter into a CDS.  AIG was a big issuer of CDSs, and it would not be shocking to learn that AIG (and, therefore, US taxpayers) would be one of the biggest losers if GM is not able to avoid bankruptcy.

Update on Saturday, April 18, 2009 at 09:02AM by Skeptic

A similar report that CDSs are actually inhibiting pre-bankruptcy debt restructurings is here.

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[FinancialServicesRenoNV]

Greetings all members,

I would just like to say hello and let you know that I'm happy to be a member - been a lurker long enough :)

Hope to contribute some and gain some knowledge along the way....