Yesterday, my weekly SSRN search on the keyword “derivatives” returned a fascinating article: Vincent S.J. Buccola, Jameson K. Mah, and Tai Zhang’s The Myth of Creditor Sabotage (forthcoming in the U. of Chi. L. Rev. 2020). For years now, as researchers in this area know, much speculation has existed about the role of net-short creditors – those creditors for whom “a derivative payoff [as a result of a debtor’s failure would be] more than sufficient to offset a loss on the underlying investment” – potentially play in a debtor’s demise. Indeed, I’ve posted about Confining Lenders with CDS Positions. Largely missing from such debates, however, has been discussion of other market participants’ incentives. Indeed, as the authors state in their Introduction: “The problem with the sabotage story is not that it misapprehends net-short creditors’ incentives, but that it ignores everyone else’s.” So basic, yet so right. Thus far, legal scholarship has insufficiently focused on this critical consideration. In hopes of helping to reverse this shortfall, I highly encourage readers to review this article. It is posted on SSRN here and an abstract is below:
Since credit derivatives began to substantially influence financial markets a decade ago, rumors have circulated