Bankruptcy better for Chrysler?

So they file for Chapter 11, because the hedge funds who hold 30% of Chrysler's secured debt refused the deal presented by the government. The president sounded critical of these "money people" for not agreeing.

He should thank them instead. I think Chrysler under Chapter 11 will have much easier time eliminating and modifying the existing obligations and claims, and faster too. That should eventually cost the government (= taxpayers) less money in the long run.

Except... those CDS contracts. I am very, very curious how those claims will be handled by the bankruptcy judge.

Who has CDS on Chrysler's debt?

As I was summarizing the potential deal between Chrysler and Fiat for my other (link) blog, it suddenly occurred to me. Oh wait...

Who has Credit Default Swap contracts on Chrysler's debt?

Major holders of $6.9 billion secured (1st-lien) debt (JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), Citigroup (C)) already agreed to forgive the debt in exchange for $2 billion cash. That would be slightly under 30 cents on a dollar. They hold 70% of the debt. The remaining 30% is held by 40+ hedge funds, and they are still holding out.

If they don't agree, Chrysler would file for Chapter 11 bankruptcy. If these hedge funds hold CDS on Chrysler's debt, they would set to collect waaay more than 30 cents on a dollar. After all, those holders of CDS written by AIG got 100% on a dollar, didn't they?

Would they drive Chrysler to bankruptcy by not agreeing, so that they could collect on their CDS? Chrysler would be reorganized with or without bankruptcy. But in case of bankruptcy then, who wrote those CDS contracts? AIG again? Or big national banks like JPM and GS? What would happen if these entities were not in a shape to pay out? Taxpayers again? What about those CDS holders without the underlying debt, if they exist?

Maybe there is no CDS outstanding on Chrysler's debt and I'm worrying needlessly in the middle of the night...