Rewriting History to Blame Tim Geithner: An Incomplete Story of the AIG Bailout [View All]

[Swede]

The bankruptcy code was designed so that no single creditor can jump to the head of the line. Once a company files in court, everyone – trade creditors, landlords, bondholders - must wait for an orderly resolution of all debt obligations. Even if a bank extends a cash-secured loan, that cash security is held by the bankruptcy estate. But creditors who holding derivative contracts get special treatment. They can immediately liquidate their contracts and move against any collateral outside of bankruptcy. This inconsistency in the law was a major reason why the Lehman bankruptcy turned out to be such a disaster. And it’s why everyone knew that an AIG bankruptcy was never a viable option.

It’s also why Geithner could never impose the threat of bankruptcy against the banks who held the credit default swaps. Even if AIG were to file for Chapter 11, the bankruptcy judge could not easily go after the cash collateral that the banks were already holding.

http://www.huffingtonpost.com/david-fiderer/rewriting-history-to-blam_b_372127.html