(MarketWatch) The creation of a "car czar" to oversee the federal bailout of Detroit's car makers might trigger what's known as an event in the vast market for credit-default swaps, prompting holders of General Motors Corp. and Ford Motor Co. credit protection to demand payments from their counterparties, analysts said.
Such an event is also likely if a federal bailout falls flat and either company files for bankruptcy, as many investors fear.
On Wednesday, Congressional Democrats and the White House reached a deal to give $15 billion in loans to the struggling GM , Ford and Chrysler LLC.
The agreement would create a presidentially appointed "car czar" who would have the power to dole out loans - and could force the companies into bankruptcy if they didn't cut deals with labor unions, creditors and other businesses, said the Associated Press. See full story on auto maker bailout.
It's this appointment of a government administrator to oversee auto makers' large expenditures and asset sales that has raised the possibility of a bankruptcy event for credit default swaps, said Banc of America Securities analyst Glen Taksler.
He noted that the International Swaps and Derivatives Association, the trade association that acts as a standard-setter for credit derivatives trading, says one trigger for a bankruptcy credit event is the appointment of an administrator, trustee or similar official to oversee all or most of an entity's assets.
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