Credit Default Swaps Sink GM
Credit Default Swaps (CDS) are a fairly complicated financial instrument. The bottom line: a significant number of GM debt holders stand to make more money if GM defaults and enters Chapter 11 than if it doesn’t. “According to the Depository Trust & Clearing Corporation, investors hold $34bn in CDS on GM,” the Financial Times reports. “Once off-setting positions are considered, the DTCC estimates CDS holders would make a net profit of $2.4bn if GM were to default.” That’s net profit. Reuters puts the total pay off at $4 billion. But don’t worry about the CDS payees; the Bank of America says “any payments are unlikely to cause widespread losses.” Easy for them to to say. The feds gave the Bank of America a $20 billion bailout in January and $118 billion worth of guarantees against bad assets. Anyway, CDS are not THE reason why GM’s debt holders won’t agree to restructure the ailing American automaker outside of bankruptcy. Some may actually believe that a liquidation offers a better chance of recouping their money. But CDS are not exactly at the bottom of the causation pile, either. Especially as the Treasury’s out-of-court debt-for-equity offer requires a 90 percent conversion rate. Say goodnight, Dick.
More by Robert Farago
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Wonder how much of this CDS 'profiteering' only became an issue after senior bond holders saw the kind of haircuts they were supposed to take outside CH11 at Chrysler. If all you ever did was buy enough protection to put a floor under your losses at 50%, in the expectation that the only way your bonds would be worth less than that is if the company went under; and are then suddenly asked to take 70+% losses outside of CH11, a CDS payout triggering event could well become the most profitable resolution available. That does not automatically make you someone who have been angling to destroy GM all along.
wsn I'd guess no one as Toyota isn't considered a likely prospect for defaulting on a loan.