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Let's Make It Perfectly Clear About GM

posted by Bob Lawless

In a post yesterday, Lubben referred to the role credit default swaps are playing in the GM, but let's make sure no one missed the point. So far, everyone seems to have missed a major point, and I think it may have played a role in Chrysler's failed attempt to stay out of bankruptcy court. I've been meaning to write up an expanded post on the topic, but Andrew Leonard over at Salon's How the World Works does a much better job than I would have done.

Here is the short version: GM's bondholders may make more money by forcing the company into bankruptcy with a lower payout than accepting a restructuring with a higher payout. Leonard is reporting on a recent article in the Financial Times. Read Leonard's post and the FT article. Then read Lubben's scholarly article that explains how credit default swaps work and how they can create perverse incentives in bankruptcy court.


Its likely be split between R and no-R. SNAC protocol isnt that old (a month or so), and most contracts initiated before that date will trade with a restructuring trigger. Many CDS holders have 'rolled' their contracts into the new format, but for names like GM where a restructuring is a real possibility, holders likely retained their R option.

Bill, what is SNAC protocol? I haven't reviewed the ISDA forms within the last 6 months.

Bob, the point of my earlier post was to raise the question whether the law under 1126 might evolve to take into account the new reality of short positions potentially created by CDS contracts. Where an immediate sale is not as readily available to solve the problem (as it was for Chrysler), reorganization issues become more important, perhaps.

I don't see the evidence that GM bondholders are acting to encourage a bankruptcy because of CDS.

Yes, there are GM CDS outstanding. But until someone comes up with some hard numbers about who actually owns them, I think it is reasonable to assume some proportion are held by those who don't hold the bonds.

1) Retail bondholders (GMS, XGM, RGM), who don't have the scale for CDSs, have multiple billions of bonds.

2) Large bondholders have in fact given a counter-offer to avoid bankruptcy. Why would they do this if they wanted bankruptcy?

3) GM is the one forcing the issue, and the one who makes the decision to offer 10 billion cash to the VEBA which is roughly speaking 4-5 years of interest on the unsecured bonds.

There is a big difference between a few, some, most, and "bondholders". Numbers please, before opinion.

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