Will GM BK Unleash CDS Tsunami?

Discussion in 'Economics' started by Cdntrader, Dec 3, 2008.

  1. Talk of automakers bankruptcy plans tonight.

    Will GM BK be the domino tha triggers trillions of CDS payoffs thereby crushing the economy?

    Has the market factored this possibility in?


    You see, there are trillions of dollars in outstanding CDS contracts for the Big Three automakers, their suppliers and financing vehicles. A filing by GM is not only going to put the real economy into cardiac arrest but will also start a chain reaction meltdown in the CDS markets as other automakers, vendors and finance units like GMAC are also sucked into the quicksand of bankruptcy. You knew when the vendor insurers pulled back from GM a few weeks ago that the jig was up.

    And many of these CDS contracts were written two, three and four years ago, at annual spreads and upfront fees far smaller than the 90 plus percent payouts that will likely be required upon a GM default. That's the dirty little secret we peripherally discussed in our interview last week with Bill Janeway, namely that most of these CDS contracts were never priced correctly to reflect the true probability of default. In a true insurance market with capital and reserve requirements, the spreads on CDS would be multiples of those demanded today for such highly correlated risks. Or to put it in fair value accounting terms, pricing CDS vs. the current yield on the underlying basis is a fool's game. Truth is not beauty, price is not value.

    If you assume a recovery value of say 20% against all of the CDS tied to the auto industry, directly and indirectly, that is a really big number. The spreads on GM today suggest recovery rates in single digits, making the potential cash payout on the CDS even larger.

    As Bloomberg News reported in August: "A default by one of the automakers would trigger writedowns and losses in the $1.2 trillion market for collateralized debt obligations that pool derivatives linked to corporate debt… 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 data compiled by Standard & Poor's.""
  2. Doesn't need to be discussed, they are going to get bailed out.
  3. Illum


    Good. Wall Street will feel this one.
  4. maxpi


    So they really are too big to fail in a sense, too big of a problem!!
  5. Yes
  6. The government will not allow GM to fail. This whole delaying game is smoke and mirrors. They want it to seem like it was difficult to aquire the bailout. It's a show for the public.
  7. Illum


    They dont have the votes, everyone on tv wants to take it out of the unions hide. They may very well go into bk, and down we go. There are no smoke and mirrors about not having the votes. It is as it seems.
  8. Maybe not for now. But give it a few months.
  9. perr


    The 3 automakers were told by the


    that they are going to GET THE LOAN, but we need to ask you a few questions.

    Which means, DON'T MIND WHAT WE ASK, JUST GO ALONG WITH OUR GAME.(you and us)
  10. richrf


    It would be way too kewl to see what happens to the Republican party if they obstruct any loan/bailout, and bring down our manufacturing and financial system with it.

    Unfortunately, millions of lives would be adversely affected, so I am not going to contemplate the thought. However, if the Republicans did lead us into a Depression as they did in 1930s, (doing Exactly the same thing as they are doing now), Palin would probably be the only person stupid enough to try to run for the Republican nomination in 2012.
    #10     Dec 7, 2008