Canadian Lawyer

June 2009

The most widely read magazine for Canadian lawyers

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LEGAL REPORT: INSOLVENCY insolvency Cashing in on One lawyer describes the number of credit default swaps out there as 'the real evil.' BY MARK CARDWELL of big corporate debtors before they go into proceedings to implement a restructuring plan to a high-stakes poker game. "The premise of the whole solvency thing is that there's never enough money for everybody," says Vauclair. "People struggle to get the biggest piece of the pie." Though each case is unique, the trad- I itional goal — and often the outcome — of these bargaining donnybrooks are agreements that avoid value-decreasing bankruptcy filings and, ultimately, save companies. But the advent of credit default swaps (CDSs) has added a whole new dimension to an already complex game in recent years. "They're like an ace or a wild card up a creditor's sleeve," says Vauclair, a partner in McCarthy Tétrault LLP's Montreal office and co- leader of the firm's national bankruptcy and restructuring group. "If a creditor nsolvency lawyer Sylvain Vauclair likes to compare the negotiations that take place between creditors is holding CDSs, they may have a lot more to gain from the company's fail- ure than its survival." A seemingly innocuous financial tool when it was developed and approved in the United States a decade ago, CDSs are basically unregulated insurance contracts in which investors pay pre- miums in return for payouts that are triggered by specified events — in this case a default or trade down in the dif- ference of an investment. "Essentially, they are side bets on the perform- ance of the U.S. mortgage markets and the solvency of some of the biggest financial institutions in the world, a form of legalized gambling that allows you to wager on financial outcomes without ever having to buy stocks and bonds and mortgages," journalist Steve Kroft explained during an episode of TV news show 60 Minutes that looked into CDSs (the best of the dozens of exposés that can be seen or heard on the subject on the Internet or from eco- nomic experts — www.cbsnews.com/ video/watch/?id=4546583n). Issued in untold quantities for unknown amounts, CDSs are believed to be an important component of www. C ANADIAN Law ye rmag.com JUNE 2009 47 JASON SCHNEIDER

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