About LBIE v AGFP appeal - the plaintiff's case winning it's appeal of the upheld ruling by the Appeals Court - First Division in NY is important for the entire future of derivatives and ISDA swap agreements - here's my take. Lehman HAS to win, or the future of ISDA swap agreement contracts will be either pointless and at worst cause rampant legalized precedent of CDS dealers to scam their counterparty in the event the CDS need be paid out when the market has shifted (as it did in 2008). Imagine paying your insurance premiums for years and when it came time to cover the cost of your burnt down house the insurance company could legally say you actually owed THEM money and statutory interest for each day you refused, while leaving you with $0 to repair or build your new house. Exactly what this case is about:
The ruling in favor of AGFP would make the entire ISDA swap agreements process in the future pointless should another CDS seller once the CDS position was valuable enough like Lehman's in 2008-09 the seller could just subjectively say they don't owe the agreed upon $$$ at the time of the agreement (for Lehman it was 2005) and thus, why would any ISDA agreement be made where paying premiums to a CDS seller for years could just be thrown out when the CDS seller is liable to pay out the purchasing party (like Lehman)?
Lehman's lawyers are smart in arguing that this type of ruling for AGFP would create a precident in court for any CDS seller to reneg on ISDA agreements when they became liable to payout the purchasing party of their swaps and then have their bogus and subjective valuation of the position be upheld if the purchasing party of CDS took an AGFP-like party to court for violating the agreed terms of the ISDA agreement they made when entering the agreement.
Not that hard to understand. If this is upheld in court, any CDS seller can reneg on the ISDA swap agreement terms and valuation methods to payout/or demand $ (like AGFP) leaving the CDS purchasing party S.O.L. and basically allowing ISDA agreements to become pointless. Obviously this is a problem because this ruling being upheld would allow anyone else to use this as a precedent to rip off any CDS buying party that entered into and ISDA swap agreement with a CDS selller. Which is, simply put, a catastrophic problem that encourages ripping off any institution buying CDS.
