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Does the "conservatorship" for Freddie and Fannie . . .?
. . . trigger CDS claims by creating a credit event?
What's the fallout?
1 Answer
- 1 decade agoFavorite Answer
Yes, this is a credit event, but....
...the takeover is not a credit default; thus, the seller of protection does not (yet!) pay anything to the buyer.
However, the writers of many of these CDS contracts have included a "change of control" clause, which might cause this event to unwind the CDS contract.
In this case of unwinding, the contract is canceled: the buyer returns the initial collateral to the seller, and the seller no longer provides protection, nor does receives any future premiums.
The loss of protection will have balance sheet impact on the buyers -- e.g., increase the capital adequacy requirements of the buyer (especially ones regulated by BASEL-II)
The loss of premium will have income statement impact on the sellers -- e.g., decrease the revenue of the seller.
