In a world before credit default swaps, it was in the best interests of creditors to avoid bankruptcy. But in today's world of casino financing, forcing companies into bankruptcy has become a profitable enterprise.
Hedge funds and other investors stand to make billions of dollars on credit insurance contracts if GM declares bankruptcy, a prospect that is complicating efforts to persuade creditors to agree to a restructuring plan for the automaker, analysts say.
Holders of $27bn in GM bonds have until June 1 to decide whether to swap their debt for a 10 per cent equity stake in the company as part of an offer that would give the US government 50 per cent of the shares, a United Auto Workers union healthcare fund 39 per cent and existing shareholders 1 per cent.
However, analysts say the chances the proposal will be accepted have been diminished by the large number of credit default swap (CDS) contracts written on GM’s debt.
Holders of such swaps would be paid in the event of a default – but would lose money if they agreed to restructure GM’s debt. For investors who own bonds and CDS, this could create an incentive to favour a bankruptcy filing.
According to the Depository Trust & Clearing Corporation, investors hold $34bn in CDS on GM. Once off-setting positions are considered, the DTCC estimates CDS holders would make a net profit of $2.4bn if GM were to default.
The opposition of 10 per cent of bondholders is enough to derail the proposal, which has already triggered protests from investors who argue it unfairly rewards the UAW at the expense of bondholders.
“You have every incentive not to agree,” said one bondholder, a large credit hedge fund. “You would be locking in a loss if you did. It isn’t only the ‘shark’ capital; it will be the mom and pop mutual funds who will oppose this deal.”
And just think, if AIG was the counter-party on these CDS's then we can expect yet another taxpayer bailout. Oh, joy!
Taxpayers get to fund the destruction of their own jobs. Again!
If you want to know more about why a 363 sale is likely to be blocked, check out this link.
BTW, a Chrysler bankruptcy pales in comparison to a GM bankruptcy.
on the other hand
GM is planning on offshore outsourcing 98% of all production plus "move their headquarters out of Detroit" so my attitude is to save the UAW pensions, health care, get all of the U.S. taxpayer money back and plain let GM go to the dogs where it belongs.
Seriously, they have been labor arbitraging U.S. workers for years as their business model...repressed fuel economy savings, you name it and this last move to offshore outsource all of those jobs we're supposedly trying to save..
ya know, can't we just liquidate them and start a new with a real U.S. auto manufacturer instead of "this"?
I realize this is probably old news to you, but when one considers all the TARP monies, together with the simulus monies, which have GREATLY increased offshoring of American jobs in the last few months, and that some of those elected clowns at the federal level are finally beginning to comprehend the resulting dramatic shrinkage of the tax revenue base (as the former workers make up the bulk of fed taxes collected - including FICA, of course, while corporations make up only around 7% - which should actually be 35% to 40% - but for all that "profit laundering" at all those offshore finance centers, a k a tax havens).
Unfortunately, it's too late now as the cascading effects will probably make the Great Depression appear mighty tame by comparison.
If I understand this situation correctly...
Isn't this the equivalent of me taking a life insurance policy out on each individual of an office building, and then locking the doors with everyone inside once there is a fire so that I can collect on those policies?
Excellent example, but the way they usually work it is that it is the equivalent of you taking out MULTIPLE LIFE INSURANCE POLICIES on each individual - which is how that unholy number of trillions of dollars comes to be constantly bandied about.
GM is going down
As terrible as it is, this is long overdue based on what I have been reading http://www.washingtontimes.com/news/2009/may/30/gm-tailgating-chrysler-bankruptcy/ GM has been getting too big for their own good and promising too much to the unions. Hate to see it happen, but inevitable...
it is not the unions
It is GM, their mismanagement and their insanity with globalization that done them in.
This union bashing is just getting absurd, not everything is about labor costs.
The salary difference between US auto manufacturers and foreign auto workers (here in the US) is nominal.
Workers at US Honda and Toyota have socialized healthcare provided by the Japanese Gov't.
The union bashing is ridiculous and I am sick of the goddamn Reaganites pulling this bullshit out of their ass.
Instead of building SUV's and muscle cars when gas is surging over $4 gal. try building cars that people want. Poor management with zero foresight caused this. When GM announced they were making more $$$ with GMAC than building cars should have been a fuckin clue.
Did the U.S. Gov contribute to the GM Bankruptcy?
I heard an interesting commentary:
The USG contributed to GM's bankruptcy by maintaining cheap gas in the U.S. European and Asian governments promoted small energy efficient cars by taxing gasoline so high that consumers found smaller cars appealing.
The commentary didn't even mention the tax breaks for SUV's.
But SUVs had huge profit margins.
I believe the American automakers blow it in the 1970s by not responding to competition from Japanese automakers.
Japanese automakers captured market share mainly through price and perceived quality differences. I sometimes think that there was unwritten rule with American automakers that they could not build a car to last more than five years because they wanted people to comeback and buy another.
American automakers troubles are a result of absolutely poor management.
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