Fine Print Bites Deutsche Bank in CDS Suit
Indeed, that's exactly the problem that occurred in the dispute between Deutsche Bank and Ambac.
In the deal, Deutsche Bank was required to make a series of fixed-rate payments to Ambac for providing insurance against the default on a series of bonds issued by Solutia, a chemical company. In return, Ambac agreed to pay Deutsche Bank $8.77 million in the event of a default by Solutia, as long the German bank could deliver those bonds within a month of after making a demand for the payment.
Solutia filed for bankruptcy in December 2003. A few weeks, later Deutsche Bank notified Ambac it intended to collect on the $8.77 million and would soon deliver the underlying bonds as required. But Deutsche Bank had difficulty obtaining those bonds from two other big banks, J.P. Morgan Chase (JPM) and Credit Suisse (CSR). It missed the deadline for the delivering the bonds by several months.
Deutsche Bank entered into the swap agreement with Ambac without having actual custody of the Solutia bonds. But it had separate deals with JPMorgan and Credit Suisse to get those bonds in the event of a default.In fact, the deal with JPMorgan also was arranged as a credit default swap. In that deal, JPMorgan was buying insurance from Deutsche Bank and promising to deliver the bonds to the German bank in the event of a default. But this round-robin method of locating the Solutia bonds didn't go as smoothly as planned. When Deutsche Bank finally was able to make delivery, Ambac refused to pay, ultimately sparking the dispute that led to the litigation. Such disputes rarely come to the public's attention because they often either arbitrated or resolved through private negotiation. But credit derivative experts say such disputes could become more common once the economy softens and more companies begin filing for bankruptcy.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV