July 15, 2009 (FinancialWire) — Dr. Susanne Trimbath’s “Outside The Ivory Tower” blog at Investrend Weblogs recently laid-out a strong argument that, in the current market environment, lack of success for a company could mean the opposite for shareholders. As an example, Trimbath notes the market value of Bank of America (NYSE: BAC) in March was $32 billion, while the contracts that payoff if Bank of America fails are worth $119 billion.

From the blog post:

“Back in March I wrote a piece for NewGeography.com, called Burnin’ Down the House, on the financial crisis. I used data on derivatives outstanding made available by the Depository Trust and Clearing Corporation for publicly traded credit default swap contracts and compared that to the market value for public companies based on recent closing stock prices. In case after case, there are more derivatives than there are underlying assets - meaning you could buy all the equity to take control of a company, drive the company into default, and profit from the derivatives payoff.

“Here’s an example of just how absurd this is: The market value of Bank of America in March was $32 billion; the contracts that payoff if Bank of America fails are worth $119 billion. This isn’t rocket science math. It could be worth a lot more to someone to see Bank of America fail than it is to see them succeed. The article includes a table with some financial companies and home builders, alongside some countries, to give an idea of what the potential payoff would be of letting them collapse.

“Where the market value of a company’s publicly-traded shares is less than the derivatives outstanding, the ‘market’ is probably betting against the company. The average derivatives outstanding for entities with more derivatives than market value are 22 times the value of the entity. So, for every company that goes into bankruptcy, you can figure that some bank somewhere is going to be paying out 22 times their asset value to the credit default swap holders. Worse yet, the credit default swap pay outs may occur before a dime is distributed to any actual creditors because, in the case of AIG’s credit default swap contracts anyway, the pay outs are required when the market value of the debt slips even if the debtor does not miss any payments or go into bankruptcy.

“In other words, you could buy all the shares of Bank of America in March for $32 billion. However, if they went bankrupt, the payoff would have been $119 billion for the holders of the derivatives contracts. And at this point, we — the US taxpayers — are in the position of paying off on those contracts if the banks and other “too big” companies will be ’stressed’ by the payouts on the contracts they sold — basically doubling our risk.”

The blog post continues at IinvestrendWeblogs.net (http://www.investrendweblogs.net/strimbath), and previously published “Blog Watch” articles are accessible via the FinacialWire(tm) archives (http://www.financialwire.net/?s=Blog+Watch%3A).

Susanne Trimbath, Ph.D. is CEO and Chief Economist at STP Advisory Services, LLC. She was Senior Research Economist at Milken Institute and Senior Advisor on a USAID-sponsored capital markets project in Russia. Her early career included financial services operations at national clearing and settlement organizations in San Francisco and New York as well as at the Federal Reserve Bank of San Francisco. She also worked on Wall Street at the Pacific Stock Exchange and Depository Trust Company. A multi-published author, co-author and editor, Dr. Trimbath holds a Ph.D. in Economics from New York University. Go to http://www.investrendweblogs.net/strimbath-profile to read more about Dr. Trimbath and her “Outside The Ivory Tower” Investrend Weblog. Dr. Trimbath also invites readers to connect with her via Twitter (http://twitter.com/SusanneTrimbath).

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