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Automakers - Credit Event Trigger?



March 31, 2009 – Comments (10)

Mish has a post on the automakers being denied the bailout they have been lobbying for and what got my attention in the post is that he say it will be a Credit Event Trigger.

He says:

I have reported before that GM has a $trillion or so in credit default swaps written on it (but my information on this is well over a year old). If banks stocks rally tomorrow (or even if they simply do not collapse), you will know that banks are fully hedged or on the right side of those swaps.

However, given the swaps dwarf GM bonds, it is virtually guaranteed that someone is on the wrong side of them.

Contrast the trillion to the various billion numbers in the article.  The CDS are big. 

This is one to watch...  

10 Comments – Post Your Own

#1) On March 31, 2009 at 8:30 PM, motleyanimal (39.46) wrote:

This is old too, from December 2008, but it claims that the debt of GM is covered by a lot less than a trillion in CDS.

The Depository Trust & Clearing Corporation reports that there are over $65bn in credit default swaps naming GM as the reference credit. According to its most recent financial statements, GM has a total of $36 to 38bn in outstanding long-term debt, the kind associated with CDSs. Obviously not all of the protection buyers hold GM debt. There is a lot of money bet against GM’s survival, and the holders of that protection have a real reason to want GM to fail. I’d call that gambling, and I explain why in this diary. It’s important to note that the losses won’t affect GM. Only the protection sellers will have to pay off the bets

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#2) On March 31, 2009 at 8:38 PM, motleyanimal (39.46) wrote:

I got some more info from the source.

Mish says:2 days ago, 10:54:24 PM“re: the credit default swaps, do we know who wrote the $1 Trillion swaps on GM bankruptcy? Who would possibly be able to pay out such a sum? (And who was dumb enough to bet GM wouldn't go tits up?) 
The $1T is a figure I got from Bennet Sedacca years ago. I have no idea what it is now. Possibly it was unwound when Obama gave all appearances that he would not let GM go under. Then again I would not be surprised if it is triple that ... except for what it might cause if it was. Report this comment
#3) On March 31, 2009 at 8:45 PM, cdulan (89.18) wrote:

Mish is putting too much into the stocks. 

We have no way of knowing who will be net long and who is net short automakers debt.  I think Mish would agree to this.

But we know it is a credit event, and thus the collateral requirements will once again trigger a flurry of cash activity.  Treasury bills and instruments should go up due to all the counterparties wanting solid collateral and ready access to cash.

 What is interesting is that in my review of a few PIMCO funds I saw significant position of CDS writing on the automakers debt issues.  Beyond just what Bill Gross' team is doing, I wonder how many other funds, pensions, and insurance companies have taken up the sport of writing insurance on such debt.  It is my opinion that they are more risky than the brokers who make the market.  The government knows JPM is sitting on 8.9T in CDS positions, yet government guarantees ensure that JPM will be able to clear all trades regardless of whether they are net long or short.  What is not known is who is so exposed on the CDS writing side that they will follow the path of AIG.  Based on recent events and the "hide the salami" game that is going on, it is likely that it is not the major CDS broker banks that are net short CDS (except Citi and UBS) but instead is concentrated in European, Japanese life insurers or banks.

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#4) On March 31, 2009 at 10:01 PM, motleyanimal (39.46) wrote:

It's interesting that newer CDS do not cover restructuring as a credit event trigger. I'm expecting that quite a lot of restructuring is coming in the future.

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#5) On April 01, 2009 at 12:12 AM, angusthermopylae (37.87) wrote:

credit event trigger

Forgive my ignorance, but does that mean that some (or all) of these crdeit default swaps will have to be paid out if GM goes under?

Oh boy!  I feel like a citizen in ancient Rome:  The warriors (financials, investment institutions, CEOs) are on the floor of the coliseum,  armed to the teeth with credit default swaps, shorts, treasuries, and low interest rates....

...they are tired, numbers already thinned by the Great Beast of Illiquidity (or maybe it was the Goblin of Insolvency...witnesses can't agree...)  Several of the most prominent warriors have succumbed to the Monster of Mortgage Crisis.  Wounded and bleeding froma thousand cuts, their weaker members don't see the Horde of Commercial Bankruptcies sneaking up on them...

They are looking grim, but confident.  Even though they just lost a CEO to the Bailout Brigands, most have survived the heckling by the members of the Senate...

...they're watching the gates slowly open, letting in the next beast.  Will it bethe Nationalization Nemesis?  Will the SEC Auditors be upon them?  Or will one of their own members succumb to his wounds, causing their loyal credit default swaps to turn on all their masters?

The Coliseum floor is already covered in blood.  You have to feel sorry for the poor guy who is going to be stuck cleaning up this mess.

(Yeah, I like gladiator movies...what can I say?)

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#6) On April 01, 2009 at 9:29 AM, EHoyle80 (< 20) wrote:

The Stock Research Portal says that President Obama is taking a big political risk with the auto bailout. “If a merger is not struck between Chrysler and Fiat within 30 days, or if GM is given a further extension on its restructuring plan after 60 days, the U.S. Administration will – at least in my view – lose credibility with respect to the positions it takes on the economy generally.”

 Via Stock Research Portal 

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#7) On April 01, 2009 at 9:37 AM, dwot (29.67) wrote:

angusthermopylae, people insure their investments and if they go sour they try and collect and all of a sudden many companies balance sheet change dramatically as assets are written off, claims are paid, etc....

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#8) On April 01, 2009 at 10:17 AM, angusthermopylae (37.87) wrote:

Thanks, dwot--that was my understanding, but I wanted to be sure of the terminology.

Yes, I can foresee a cascading effect.  Add in commercial real-estate, and it could go nuclear very quickly...within a quarter of GM's demise (whatever form that will take...)  And the fallout...pervasive.

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#9) On April 03, 2009 at 6:50 PM, jszoke01 (26.13) wrote:

Motley - Where did you find the total amount of CDS written on GM Debt on that website?

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#10) On March 15, 2010 at 7:39 PM, Superdrol (87.08) wrote:

Obviously this did not happen, but can someone explain what the original post was supposed to refer to ? The swap amount was higher than GM's debt in bonds ?

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