95% Chance One of The Big 2.8 Will File for Bankruptcy

Edward Niedermeyer
by Edward Niedermeyer

According to UniCredit SpA [ via Bloomberg], one of America's three biggest automakers is almost certain to default within the next five years. Extrapolating from risk premiums on credit-default swaps, GM faces an 84 percent chance of default, while Ford is looking at "at least 75 percent risk." Jochen Felsenheimer, chief of credit strategy at UniCredit, says "The costs imply there is close to 100 percent probability that one of the big three will file for Chapter 11 bankruptcy." And there's little the D3 can do to prevent default if the overall economic climate doesn't improve– and soon. "There might be a default at any time.'' It's the Collateralized Debt Obligations (CDOs), stupid. A variant of the Structured Investment Vehicles that brought down the mortgage market, CDO's are securities that repackage pools of bonds, loans and credit-default swaps and divide their cash flow into notes of varying risk and returns, which are then sold to investors. Credit-default swaps on GM and Ford were included in more than 80 percent of CDOs created before they lost their investment-grade debt rankings in 2005, according to Standard & Poor's. Bottom line: if one of the domestics goes down, it's taking a whole lot of market with it. With GM paying $4.7m upfront plus $500,000 a year to secure each $10m in financing, it's not a question of if, but when.

Edward Niedermeyer
Edward Niedermeyer

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  • Nonce Nonce on Aug 06, 2008
    Didn’t TTAC predict that Chrysler will file by August 4th? It’s August 5th, and nothing happened. Or did something change behind the scenes that I’m unaware of that negated this prediction? If you make enough predictions, some of them are bound to come true.
  • Alex Nigro Alex Nigro on Aug 06, 2008

    nonce, So it's the "throw stuff at the wall and see what sticks" philosophy to predictions. I'm down with that, everybody's done it.

  • Capeplates Capeplates on Aug 07, 2008

    95% chance of bankruptcy in FIVE years! Didn't realise they were in such a healthy position at the moment

  • Anonymous Anonymous on Aug 07, 2008

    [...] - RANTS*#457 - Rants - Autoextremist.com ~ the bare-knuckled, unvarnished, high octane truth... "The probability that one of the three will be unable to fund its business is more than 95 perc... China has only to sell a little portion of its Trillion US dollars it hoards and the USA can turn [...]