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  • Writer's pictureKirk Hartley

Stock Price Pressure, Mass Torts, and Credit Default Swaps

Hard to believe. Banks do face pressures these days, and B of A is under particular pressure with its stock price down 53%. But now B of A is responding to generalized blog comments by Henry Blodget (if that name rings a bell, think back to the dotcom bubble and recall that he was sanctioned with a lifetime ban from the securities industry). Stories are here and here, and Henry’s take is here. Hopefully B of A’s management team can do better.

At present, B of A credit default swaps are becoming expensive and some see a "downward spiral," as described here. Some compare CDS contracts to asbestos, saying both are toxic. There also are economics papers analyzing CDS and related risks of bankruptcy, including the impacts of mass tort risks. See also this paper on hedges, CDS and the financial fiasco. All this takes me back to the days when CDS rates for "asbestos companies" were a major topic. And, even after a chapter 11 filings, investors bet on how reorganization plan outcomes will vary depending on the amount of the estimated liability, as illustrated by this presentation, especially its page 16.

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