What's wild is that nobody knows WHO is on the hook for those CDS's, and IF they can afford to make good on them. So frigging dangerous... I bet AIG wrote some of it.
And if AIG takes another multi-billion dollar loss, we can always ask the US Government to re-write the bailout again, how about a $500 billion loan at 1% for AIG .... maybe that might be enough?
outright BK no problems for CDS market - it will handle it as always and surprise all the nay-sayers who has no clue how the market works (99% people here). it will be painful exercise for Ops as US Autos are one of the most usual reference entities. separately, CDS on GM/GMAC trade mostly NR, i.e. the issue above does not apply. that said some older contracts may be on MR which, if the institution does not hedge the basis risk right, could spell a bit of problems. i would hope that everybody was on top of that in the past year...
A guy on CNBC today was saying that a 'substantial' change in control at GM would constitute a default on the CDS market. gm debt is trading distressed so settlement could be big. He also said if GMAC goes under(if the bondholders favor liquidation) then the government should forget the bailout because GM would go bankrupt immediatly Scary stuff.
substantial change in control does NOT constitute a Credit Event. however, and that would be a funny one, if Treasury takes over the majority of debt (i think it is defined as 75%) then the sole successor become Treasury and CDS reference entity changes from GM/GMAC to UST - that would be a hell of a fun for many hedge funds. of course this is not in the cards but that would be truly funny...