GM Bondholders will force bankruptcy because they're holding Credit Default Swaps

[Joanne98]

Showdown at the General Motors corral

With three weeks to go before General Motors bondholders must decide whether to accept a government offer to settle their claims in an out-of-court restructuring, the chances that G.M. will be forced to file for the mother of all Chapter 11 bankruptcies are better than ever. And if you feel inclined to blame the ever-popular credit default swap (CDS) as the villain, go right ahead.

The Financial Times has the smoking gun.

According to the Depository Trust & Clearing Corporation, investors hold $34 billion in CDS on GM. Once off-setting positions are considered, the DTCC estimates CDS holders would make a net profit of $2.4 billion if GM were to default.

Let's restate that: The bondholders (that own CDs) stand to do better if they force G.M. to declare bankruptcy. It's a no-brainer: Suffer huge losses by agreeing to the government's offer, or cash in by collecting insurance payments in the event of a G.M. default. But not surprisingly, the bondholders are denying any such nefarious culpability. According to the New York Times' Michael J. de la Merced, the bondholders "are seeking only to be treated fairly in a restructuring of the company." In their opinion, the government's deal, which would give the bondholders a puny 10 percent stake in the new G.M., is "designed to fail." So it's the government that's forcing bankruptcy.

From the FT:

"You have every incentive not to agree," said one bondholder, a large credit hedge fund. "You would be locking in a loss if you did. It isn't only the 'shark' capital; it will be the mom and pop mutual funds who will oppose this deal."

How much of this is real and how much is just the swagger of a couple of bull moose preparing to lock antlers? If the Chrysler saga offers us a model, then we should recall that as the government-set deadline got closer, the two sides haggled their way near to an agreement, before hedge fund intransigence ended up scuttling a final accommodation. But that didn't work out so well for the hedge funds.

http://www.salon.com/tech/htww/2009/05/12/the_general_motors_showdown/index.html?source=rss&aim=/tech/htww

Here's the FT article..........

Credit insurance hampers GM restructuring
By Henny Sender in New York

Published: May 11 2009 23:33 | Last updated: May 11 2009 23:33

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

Holders of $27bn in GM bonds have until June 1 to decide whether to swap their debt for a 10 per cent equity stake in the company as part of an offer that would give the US government 50 per cent of the shares, a United Auto Workers union healthcare fund 39 per cent and existing shareholders 1 per cent.

However, analysts say the chances the proposal will be accepted have been diminished by the large number of credit default swap (CDS) contracts written on GM’s debt.

Holders of such swaps would be paid in the event of a default – but would lose money if they agreed to restructure GM’s debt. For investors who own bonds and CDS, this could create an incentive to favour a bankruptcy filing.

According to the Depository Trust & Clearing Corporation, investors hold $34bn in CDS on GM. Once off-setting positions are considered, the DTCC estimates CDS holders would make a net profit of $2.4bn if GM were to default.

Continued>>>
http://www.ft.com/cms/s/0/1e2bf9ea-3e54-11de-9a6c-00144feabdc0.html

It's already a done deal. That's why THIS happened!

Final Harbinger of Bankruptcy? GM Executives Dumping Near-Worthless Stock

Bloomberg reports, "General Motors Corp. reported that six executives sold shares in the company" earlier this week, "As the largest U.S. automaker said it's more probable than previously thought that it will need to file for bankruptcy." Recently retired Vice-Chairman and product development czar Bob Lutz and GM North America President Troy Clarke were among a group of six top executives who "sold all their holdings in the Detroit-based company, according to regulatory filings."

They didn't get much for their shares. The AP reports, "Shares of General Motors Corp. tumbled to their lowest level since 1933 Tuesday... In early trading, GM shares dropped to $1.09, the lowest level since April 28, 1933, according to the Center for Research in Security Prices at the University of Chicago."

As of this writing, the price of a share of GM stock had hit a daily low of $1.00.

Mirko Mikelic, a fund manager with Fifth Third Asset Management, told Bloomberg, "It should be clear now where they're headed...Everyone is positioning for bankruptcy now."

http://usnews.rankingsandreviews.com/cars-trucks/daily-news/090513-Final-Harbinger-of-Bankruptcy-GM-Executives-Dumping-Near-Worthless-Stock/

[Turbineguy]

1. As long as the insurance company covering the CDS's

can pay....

[dkf]

2. I wonder if our Govt ever regrets bailing out AIG and saving

CDS as an asset class.

[dysfunctional press]

4. of course not.

protecting the wealth of the ruling class is their JOB.

[Earth Bound Misfit]

3. I spoke with a few UAW PAC guys yesterday

We (Atlantic City casino workers) are trying to organize with the UAW. I was asked to participate in a conference call w/ AFL-CIO re: EFCA, but it was cancelled. Speaking with the PAC guys, I asked about the GM situation, their response was not encouraging---"It's a MESS" was probably the most OPTIMISTIC.

Not a very pleasant outlook for G.M.

Mission Accomplished, indeed.

Side note: I used to work at the Depository Trust & Clearing Corporation, more than 20 years ago. We were Union, the only Unionized office workers on Wall St at the time. I was there only about a year, left to open a Deli.

ETA: Bloomberg reports, "General Motors Corp. reported that six executives sold shares in the company" earlier this week...Recently retired Vice-Chairman and product development czar Bob Lutz and GM North America President Troy Clarke were among a group of six top executives who "sold all their holdings in the Detroit-based company, according to regulatory filings."

Stick a fork in 'em, they're done. ***sigh***