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In an article posted on the Financial Times on 5/11/09 the demise of GM is disected and the conclusion is that bankruptcy is all but in the cards.  Yes, the prediction of their death has been imminent for weeks now, but the reason is sick and twisted. Yes, the title "GM Bankruptcy a Sure Bet" is intentional.  The stakeholders in this sorry tale are the same as in the Chrysler bankruptcy. The Unions making concessions--Check.  Management making concessions--Check.  The Bondholder making concessions--HOLD ON, not so fast.

Credit Insurance Hampers GM Restructuring

Hedge funds and other investors stand to make billions of dollars on credit insurance contracts if GM de-clares bankruptcy, a prospect that is complicating efforts to persuade creditors to agree to a restructuring plan for the carmaker, analysts say.

Henny Sender of the Financial Times writes a short article with little commentary because the words speak for themselves.  Our favorite Hedge Funds have decided to not take the sucker bet.  They have taken out $34bn in Credit Default Swaps on the $27bn in bonds they hold.  Should they take the 10% equity stake in the company in exchange for their bond holdings as the Government asks or refuse and receive a pay out with a net profit of $2.4bn if GM declares bankruptcy? Even if you hate math, the formula is easy to calculate.

Since I am sure they are real Americans, the choice is clear.

The opposition of 10 per cent of bondholders is enough to derail the proposal, which has already triggered protests from investors who argue it unfairly rewards the UAW at the expense of bondholders.

The UAW has agreed to take a 39% equity stake.  Well the Healthcare Fund anyway.  The actual workers have only the chance to keep their jobs, a slight chance.

The CDS positions mark a crucial difference between GM and Chrysler, which filed for bankruptcy protection as part of what it hopes will be a swift restructuring. Chrysler had $6.9bn in bank loans, on which there were few credit insurance contracts.

We all know what happened to Chrysler when the Hedge Fund Bondholder's were done.  The GM Bondholder's are going to double down on their bet.

Originally posted to whoknu on Thu May 14, 2009 at 06:14 PM PDT.

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Comment Preferences

  •  Tips for a nervous worker (12+ / 0-)

    in the Auto Supplier business.

    Nature's laws are the invisible government of the earth - Alfred Montapert

    by whoknu on Thu May 14, 2009 at 06:15:45 PM PDT

  •  GM to pay suppliers 1 week before deadline.. (5+ / 0-)

    Have to find the link, but I waw that somewhere today.. at least "Important, or mission critical" or something like that.  That basically means it's in the can..

    25-33% dealer letters go out Friday, Like Chrysler's filing today.  That was reported earlier I think..

  •  And they will import cars in from China to US Mkt (1+ / 0-)
    Recommended by:
    whoknu

    That does sound interesting.. One way or another, it's interesting..

  •  Yes (1+ / 0-)
    Recommended by:
    Dirtandiron

    interestingly enough we were told last week that we were going to be paid early.  We also did get good info on the government guarantee/insurance of receivables unlike with Chrysler.  Chrysler would not tell us anything.  

    My Republican bosses were one of the first in line for their bailout.

    Nature's laws are the invisible government of the earth - Alfred Montapert

    by whoknu on Thu May 14, 2009 at 06:23:28 PM PDT

  •  Dealers (2+ / 0-)
    Recommended by:
    Dirtandiron, whoknu

    Between Chrysler and GM, 3400 dealerships are going out of business, costing something like 100,000 jobs.  That'll put the unemployment rate up to about 9.1% or so.

    •  Although I dont think every (1+ / 0-)
      Recommended by:
      Dirtandiron

      dealership closing means job losses. On the local news, they were talking to local dealers who got letters from Chrysler today, and they said that since they sell other brands of cars, they dont plan to let anyone go.

  •  from Michigan Liberal: (6+ / 0-)
    Recommended by:
    jj32, Bronx59, Losty, Egalitare, whoknu, memorybabe

       As a majority owner in General Motors Corp., the U.S. government could make it difficult to compete with other automakers and could influence business strategy in a way that harms the stock price, the automaker said in a recent regulatory filing.

    Seriously?  

    Here's a quick overview of GM stock pricing 2000- present

    5/11/2000 - $82.38

    5/10/2002 - $66.20

    5/12/2004 - $44.03

    5/12/2006 - $26.59

    5/13/2008 - $20.29

    5/13/2009 - $1.61

    How do these clowns even say things like that with a straight face?

  •  CDS's (2+ / 0-)
    Recommended by:
    whoknu, memorybabe

    They have taken out $34bn in Credit Default Swaps on the $27bn in bonds they hold.

    I believe there are over $60 trillion in CDS's in the US. The US economy is about $14 trillion. Do they really believe they will get anything for their CDS's ( Unless they are related to Goldman Sachs which got 100%)

    •  they seem to think they will (2+ / 0-)
      Recommended by:
      Dirtandiron, Egalitare

      and the market seems to think so too.  I guess they have never heard of the old adage -- A bird in the hand is worth two in the bush...

      Nature's laws are the invisible government of the earth - Alfred Montapert

      by whoknu on Thu May 14, 2009 at 06:53:23 PM PDT

      [ Parent ]

      •  Just another example of the need for regulation (3+ / 0-)
        Recommended by:
        Bronx59, Dirtandiron, whoknu

        Proper regulation would have only allowed entities with "skin in the game" to hedge against potential losses, and only with some minimum amount of verified collateral. Far too many CDS were bets several times removed from responsibility.

        Even Vegas sets limits on how much you can borrow from the house to bet.

        Single Payer...NOW!!!

        by Egalitare on Thu May 14, 2009 at 08:11:12 PM PDT

        [ Parent ]

    •  That's a continual distortion on this site... (1+ / 0-)
      Recommended by:
      sydneyluv

      People need to understand what CDS are....they are insurance claims on default. So the value of the CDs isn't 60 trillion, but the total amount of money protected is 60 trillion--for some reason, this scares people but it really shouldn't...for example...

      It's just like how the entire Gulf Coast has property insurance on trillions worth of property, but the actual value of those insurance premiums is a fraction of that value. The traded value of the CDS is a fraction of 60 trillion. Your car insurance represents a potential liability to the insurance company of $20K or whatever your car's worth, but in actuary terms, the liability is that times the probability of an adverse event.  

      The only way the 60 trillion comes to fruition is if every single company in the country that holds debt goes bankrupt. Basically, it would be the economic equivalent scenario of a asteroid impact on earth--it don't mean a damn if you got insurance or not. Just like the insurance companies couldn't pay, neither could any of the underwriters of CDS insurance.

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