Credit Event
Is the Bear Stearns “rescue” a credit event for the BS CDS protection buyers ?
I am not a lawyer, but I first sight the answer is probably NO.
JPM is assuming all BS liabilities so the CDS should converge with JPM.
There are 6 credit events:
1.Bankruptcy
2.Failure to pay
3.Obligation Acceleration
4.Obligation Default
5.Repudiation/Moratorium
6.Restructuring
BS is not bankrupt. The one that will fool outsiders is number 6: restructuring. There is no restructuring here as far liabilities are concerned.
March 17th, 2008 at 9:33 am
On the call last night, JPM indicated they were only taking BS wokring capital and clearing liabilities — NOT guaranteeing all their balance sheet liabilities. They could still default under those obligations.
March 17th, 2008 at 9:50 am
They could default, but it will be hard. The Fed is backstopping the asset side and JPM is taking counterparty risk that was previously BS.
March 18th, 2008 at 1:23 pm
I don’t have access to intraday U.S., but Markit say that Bear was a lot wider than J.P. E.O.D. as there are doubts the deal will go through
March 18th, 2008 at 1:50 pm
Noel:
It is wider but no way near as wide as before the “rescue.”
What happened is that the curve has turned back to normal, the 1 year was above 1000 bp and is back below 300 bp. It will converge over time but JPM will have to pay up, I don’t think the deal will pass at $2 and the longer they wait the more they will have to pay up, if conditions improve.