Tripped Up By Language Landmines

Financial Times - November 3, 2006
by Richard Beales and Michael Mackenzie in New York

[JT Note: The Financial Times was referring to the CDS premium. If new debt were issued and the contract had not yet expired and premiums were being made, BlueMountain would be obligated to provide protection. Few CDS contracts have a “kill” clause if all outstanding debt is retired, and fewer still reference only a specific bond issue, although one can write a CDS contract this way if one chooses.]

Janet Tavakoli, an independent consultant, says sophisticated hedge funds should be aware of these risks. “BlueMountain was free to write in their own language [in CDS trades] in anticipation of the possibility of a succession event such as the one presented by UPC,” she says. “The bigger point is that models are not capturing this risk. It is the language landmines that blow you up.”

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