International Brotherhood of Teamsters General President Jim Hoffa today sent letters to the Securities and Exchange Commission (SEC), state Attorneys General, state insurance officials and Congressional leaders on financial industry oversight calling on regulators to review the questionable promotion of credit default swaps for bonds of YRC Worldwide, Inc. (NasdaqGS: YRCW), the country’s largest less-than-truckload company. Hoffa urged the oversight bodies to investigate financial firms that are underwriting and/or marketing basis packages that consist of YRC bonds and credit default swaps (CDS). Financial firms such as Goldman Sachs, Deutsche Bank, TD Bank, Barclays and UBS have a history of making markets in these types of derivative financial products.
“Certain financial firms, have been or are marketing and/or underwriting a strategy where bonds in YRCW would be bought by investors with the intent of voting against the exchange, thereby triggering a bankruptcy that would pay the investors and possible other financial firms huge profits from the high CDS payments which would be triggered by a YRC bankruptcy or liquidation,” Hoffa wrote. “The profit from the YRCW CDSs would far outweigh losses from the failed YRCW bonds.”
Speculative investors owning credit default swaps for YRCW bonds would receive full payment, and a potential windfall profit based on the depressed market price of the underlying bonds, upon a financial collapse of YRCW, which would destroy more than 30,000 jobs and the financial stability of tens of thousands of families in the midst of an unprecedented recession.
Through the federal bailout of AIG, investment banks received premiums for their CDS, while all other stakeholders suffered. Today they may be putting the economy in danger once again. The Teamsters Union supports policies that would regulate such financial instruments and other shadow financial market practices, currently considered by Congress, because these instruments and the way they are packaged distort economic incentives, undermining recovery to provide easy payouts to fat cats.
“As I am sure you know, CDSs are nothing more than insurance contracts, i.e., the ‘swap’ of a premium for a guarantee that a payment will be triggered by the financial default being insured,” Hoffa continued. “The YRCW long bond/CDS marketing scheme by certain banks and hedge funds that are located within your jurisdiction, is nothing more than an attempt to have investors vote against a restructuring that would save YRCW.”
Professor Michael Greenberger, University of Maryland School of Law, (410) 845-9419. Professor Greenberger is an expert in derivatives and credit default swaps and is the former Director of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC).
Founded in 1903, the International Brotherhood of Teamsters represents 1.4 million hardworking men and women in the United States, Canada and Puerto Rico.