re: Ann: Status of Norton Gold Hedge with Leh... This is a very...

re: Ann: Status of Norton Gold Hedge with Leh... This is a very interesting article from a Canadian law firm, which is written in very user-friendly language, explaining the Enron case and it's wider implications.

They call the clause which allows a non-defaulting party (NGF, in this case) to both suspend further payments and to also not call for an immediate tallying of the market value of the outstanding hedge/swap/etc., a "flawed asset" clause. The process, whereby payments are suspended has traditionally been referred to as the "First Method" in derivative contracts.

I'm especially interested in this comment (my emphasis added):-

Some commentators have suggested that every ISDA Master now in force is ineligible for netting because the flawed asset clause in effect operates as a walkaway clause. In our view this is at best an overstatement. A true walkaway clause, such as that created by the rarely used First Method, allows the Non-Defaulting Party to avoid making any close-out payment to the Defaulting Party while still remaining entitled to payment. In contrast, the flawed asset clause merely suspends the Non-Defaulting Party’s current swap payment obligations to the Defaulting Party and postpones the settlement obligations until termination or cure of the default. Admittedly, if the Defaulting Party is hopelessly insolvent or is in liquidation, curing the default may be impossible; but a counterparty undergoing restructuring or administration could well emerge from insolvency, at which point the Transactions would be restored to good standing and the Non-Defaulting Party would be required to resume payment.

http://www.mcmillan.ca/Upload/Publication/enron%20v%20australia%201204.pdf

Is Lehman hopelessly insolvent? Is the US situation the same as the Australian and Canadian situations?

I've found another article discussing the US situation, in light of the Enron Australia case. Here's an extract:-

Does this decision place the capital adequacy of some banks at risk? Or is the case’s outcome just a result of unusual counterparty conduct? And would a court reach the same result with a bankrupt party in the U.S.?....
The most delightful aspect of a case such as this is the
disproportionate global ripples that it sets off. Intense
analysis and speculation as well as broad, formal reviews
have been set in motion by a case that, in large, part,
enforced a contract as written in a manner close enough to
what must have been intended....

http://jweinsteinlaw.com/pdfs/Futures-1104.pdf

This latter article looks very interesting and directly related to the US case, however I've run out of patience in reading these things. Anyone else who'd care to take up the cause is entirely welcome.