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There’s a couple of deviations from standard practice here: - In theory, secured creditors should be ahead in line and always get paid ahead of unsecured credi

There’s a couple of deviations from standard practice here: - In theory, secured creditors should be ahead in line and always get paid ahead of unsecured creditors. In actual practice, sometimes unsecured gets paid something even as secured creditors take some loss. One reason is because you end up before a bankruptcy judge, and unsecured creditors can fight for their claim and tie things up, so the secured creditors pay the unsecured ones something to go away - Related to above, security is usually fixed assets (like a factory), rather than posted cash collateral. Making derivative collateral special means it’s even better than normal secured assets-especially since your factory is a depreciating asset while tied up in court So yeah, one way to look at it is 'security means you’re paid first, what’s the problem?' but posted derivative collateral under an ISDA can be actually better than normal security.

deleted 7y ago
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wahern 7y ago
I guess it's sort of like Transfer on Death (TOD) accounts, which receive special treatment in estate law. In a contested inheritance people can still make claims to TOD assets, but because they automatically transfer to a particular recipient upon notice of death it changes the facts on the ground, both from a legal posture but also just as a practical matter. For example, a bird in the hand is better than two in the bush--the receiver of TOD assets may be willing to walk away with less than they might be able to claim simply to avoid litigation. It also makes things easier and cheaper for the fiduciary (e.g. bank, insurer, etc) because they don't have to be mired in any litigation. They transfer the assets to the TOD beneficiary as a matter of course and nobody can challenge it; if you don't like it you sue the nominal beneficiary.
ABCLAW 7y ago
>- In theory, secured creditors should be ahead in line and always get paid ahead of unsecured creditors. Some classes of unsecured creditors that are paid out before others are employees, pensioners or people with support claims. These people often have what's known as 'super priority' status. So not only are 'some' unsecured creditors afforded more security; they're often the ones society deems at risk, with the least leverage and the most need for the money.

deleted 7y ago

[deleted]

wahern 7y ago

I guess it's sort of like Transfer on Death (TOD) accounts, which receive special treatment in estate law. In a contested inheritance people can still make claims to TOD assets, but because they automatically transfer to a particular recipient upon notice of death it changes the facts on the ground, both from a legal posture but also just as a practical matter. For example, a bird in the hand is better than two in the bush--the receiver of TOD assets may be willing to walk away with less than they might be able to claim simply to avoid litigation. It also makes things easier and cheaper for the fiduciary (e.g. bank, insurer, etc) because they don't have to be mired in any litigation. They transfer the assets to the TOD beneficiary as a matter of course and nobody can challenge it; if you don't like it you sue the nominal beneficiary.

ABCLAW 7y ago

>- In theory, secured creditors should be ahead in line and always get paid ahead of unsecured creditors. Some classes of unsecured creditors that are paid out before others are employees, pensioners or people with support claims. These people often have what's known as 'super priority' status. So not only are 'some' unsecured creditors afforded more security; they're often the ones society deems at risk, with the least leverage and the most need for the money.