Tick Tock - GM Derivatives Time Bomb
From Yesterdays Market Soapbox: "GM, announced that certain GMAC financial information should no longer be relied upon and needs to be restated. There are questions over whether the sale of a controlling stake in GMAC will occur."
From Reuters:
GM, or its financing arm GMAC, is present in around 65 percent of synthetic collateralised debt obligations (CDOs), according to Standard & Poor's, and underlies an estimated $1 trillion of default swaps.
For bond investors, a GM bankruptcy would be hard, but a GMAC bankruptcy would be disastrous. GMAC is home to three quarters of the group's bonds, and is found in a large proportion of outstanding synthetic CDOs.
Standard & Poor's analyst Andrew South. "A rating action on GM could have a widespread effect on many CDOs."
The complex market in CDO squared, or CDOs of CDOs, also faces significant risk following a GM downgrade, one London-based hedge fund manager said. "To be blunt -- it would be carnage," he said.
From High Yield Bond Market Timebomb 04/28/05 : "when GM is downgraded, the market could be awash in GM debt as the institutions are required to divest, if they have not already. GM accounts for $200 Billion of the $900 Billion total in the junk bond category."
From Meet the New Boss, Same as the Old Boss Part V 05/03/05:
"The financial sector is no longer adverse to short term risk as witnessed by the proliferation of derivatives, rate swaps, CDO’s and other synthetic instruments borne of financial engineering.
These instruments; attempt to profit on ever narrowing margins; are hybrids which borrow their modeling from outside the financial domain; are not fully stress tested under real market conditions; and as such are unpredictable in their behavior."
From YO! Junkbond My Ride 05/10/05:
"in the credit derivatives markets hundreds of billions of dollars of credit default swaps and collateralized debt obligations (CDO's) linked to GM and Ford begin to come unglued. Everybody hedges like mad and a meltdown more or less occurs."
From Derivatives Event Fallout 09/22/05:
"Most arbitrage bets are positioned for a widening or divergence of GM and GMAC. Kerkorian will sell the only thing GM and GMAC are good for, GMAC's non core assets. Such as the mortgage business, raising around $28 Billion, then GM will draw the finance unit in closer.
Therefore, we believe that GM and GMAC spreads would converge, rather than diverge."
From A Bubble By Any Other Name 02/25/06:
"With less actual dollars available to place for "real" economic activity, the investment community has kept the "inertia" party going by creating leverage through financial instruments such as derivatives, CDO's, MBS and swaps."
Mike Shedlock AKA Mish's GET aptly points out in his latest missive on the subject
"GM Market Cap - $12.8 billion
GM Defaults Swaps - $1 trillion
Does anyone see a hint of a problem there?
If not, how about the fact that one player has 1/3 of that exposure?
There are so many ticking time bombs that it is simply impossible to predict which one blows up first. I suspect it will be something that no one is watching at the moment. That means the trigger is unlikely to be GM, bird flue, the YEN, Fannie Mae, or US treasuries but rather something that will become critical that the market has not focused on yet. Once the trigger is pulled, however, a cascade could pull in many of the bombs mentioned above."
Final Understatement: The GM debacle is far from over and the impact on the US economic base and financial markets will be immense.
From Reuters:
GM, or its financing arm GMAC, is present in around 65 percent of synthetic collateralised debt obligations (CDOs), according to Standard & Poor's, and underlies an estimated $1 trillion of default swaps.
For bond investors, a GM bankruptcy would be hard, but a GMAC bankruptcy would be disastrous. GMAC is home to three quarters of the group's bonds, and is found in a large proportion of outstanding synthetic CDOs.
Standard & Poor's analyst Andrew South. "A rating action on GM could have a widespread effect on many CDOs."
The complex market in CDO squared, or CDOs of CDOs, also faces significant risk following a GM downgrade, one London-based hedge fund manager said. "To be blunt -- it would be carnage," he said.
From High Yield Bond Market Timebomb 04/28/05 : "when GM is downgraded, the market could be awash in GM debt as the institutions are required to divest, if they have not already. GM accounts for $200 Billion of the $900 Billion total in the junk bond category."
From Meet the New Boss, Same as the Old Boss Part V 05/03/05:
"The financial sector is no longer adverse to short term risk as witnessed by the proliferation of derivatives, rate swaps, CDO’s and other synthetic instruments borne of financial engineering.
These instruments; attempt to profit on ever narrowing margins; are hybrids which borrow their modeling from outside the financial domain; are not fully stress tested under real market conditions; and as such are unpredictable in their behavior."
From YO! Junkbond My Ride 05/10/05:
"in the credit derivatives markets hundreds of billions of dollars of credit default swaps and collateralized debt obligations (CDO's) linked to GM and Ford begin to come unglued. Everybody hedges like mad and a meltdown more or less occurs."
From Derivatives Event Fallout 09/22/05:
"Most arbitrage bets are positioned for a widening or divergence of GM and GMAC. Kerkorian will sell the only thing GM and GMAC are good for, GMAC's non core assets. Such as the mortgage business, raising around $28 Billion, then GM will draw the finance unit in closer.
Therefore, we believe that GM and GMAC spreads would converge, rather than diverge."
From A Bubble By Any Other Name 02/25/06:
"With less actual dollars available to place for "real" economic activity, the investment community has kept the "inertia" party going by creating leverage through financial instruments such as derivatives, CDO's, MBS and swaps."
Mike Shedlock AKA Mish's GET aptly points out in his latest missive on the subject
"GM Market Cap - $12.8 billion
GM Defaults Swaps - $1 trillion
Does anyone see a hint of a problem there?
If not, how about the fact that one player has 1/3 of that exposure?
There are so many ticking time bombs that it is simply impossible to predict which one blows up first. I suspect it will be something that no one is watching at the moment. That means the trigger is unlikely to be GM, bird flue, the YEN, Fannie Mae, or US treasuries but rather something that will become critical that the market has not focused on yet. Once the trigger is pulled, however, a cascade could pull in many of the bombs mentioned above."
Final Understatement: The GM debacle is far from over and the impact on the US economic base and financial markets will be immense.
Comments