GM market cap vs. credit swaps

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?

Reuters writes Credit investors ponder GM-sized hole in universe.

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.

The company's impact is evidenced by the CDX credit default swap indices. The U.S.-based CDX4 equity tranche, containing GM, trades at 36 points up front; the same tranche in series 5, without GM, costs 27.5 points. One firm out of 125 accounts for almost a third of the premium.

Still, investors struggle to judge whether the automaker, which sells 21 percent of cars in the United States, will ultimately perish.

"A bankruptcy filing is unlikely this year," said Christophe Boulanger, auto analyst at Dresdner Kleinwort Wasserstein. "Unless Delphi goes on strike -- in which case they would stop production and it would all be over."

Parts supplier Delphi, which filed the biggest bankruptcy in U.S. automotive history in October, is negotiating with the United Auto Workers union and GM over wage and benefit issues, with a strike threatened if there is no settlement.

GMAC PIVOTAL

Should a strike be called, GM could be bankrupt by June, Boulanger said. After that any scenario might play out, but the status of GMAC will be crucial.

GMAC has traded at a premium to its parent in the credit markets on hopes a controlling stake will be sold, ring-fencing the company and possibly returning it to investment grade. Yet, despite GM's best efforts, no buyer has emerged.

Further complicating the outlook, if GMAC is not sold, and GM does go bankrupt, it is uncertain GMAC would be consolidated in the filing.

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.

"The high degree of portfolio overlap between synthetic CDO transactions sets this asset class apart," said 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.

Ultimately it is probably investors who are best placed to judge GM's prognosis, and the cost of one-year default protection on GM is currently higher than five-year protection.

Of course, the best possible outcome may also be the most likely. That is, GM will survive.

Having spent around $15 billion renewing its product offering, it is certain the company will do everything in its power to avoid bankruptcy, Boulanger said.

In other words, if the elephant is still in the room in 18 months, you can probably ignore it.

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.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/