In light of the possible bankruptcy of one or more of the big three U.S. automakers, we need to again demand to Declare All Credit Default Swaps Null And Void.
Those $65 trillion reasons for the credit market freeze will never go
away without a huge crash that then will have worth consequences than
the 1929 stock market crash. The only way to eliminate these reasons is
internationally concerted action to declare the legal obligations of
all CDS’ null and void.
What has this to do with automakers? As the folks at Institutional Risk Advisor wrote:
As Bloomberg News reported in August: "A default by one
of the automakers would trigger writedowns and losses in the $1.2
trillion market for collateralized debt obligations that pool
derivatives linked to corporate debt… Credit-default swaps on GM and
Ford were included in more than 80 percent of CDOs created before they
lost their investment-grade debt rankings in 2005, according to data
compiled by Standard & Poor’s."
…
Any bank with a large derivatives trading book is likely
to be mortally wounded as the CDS markets finally collapse. We don’t
see problems with interest rate or currency contracts, by the way, only
the great CDS Ponzi scheme is at issue – hopefully, if authorities
around the world act with purpose on rendering extinct CDS contracts as
they exist today. Call it a Christmas present to the entire world.
In another piece they report:
We
hear from a very well placed Buy Side investor with extensive business
interests in the US and EU that three primary banking institutions in
Europe, two French and one German, have such significant CDS exposure
and other problems that they cannot even begin to fund the payouts
anticipated over the next quarter.
…
Unlike the approach taken by Paulson and Geithner to bailout AIG and JPM (via the Bear Stearns rescue), however, the investor claims that EU officials are considering a moratorium on CDS payments
by the three Euroland banks in question. The banks would be given ten
years to write down their CDS and hedge fund exposures and would
receive additional infusions of capital by their respective
governments. The source claims that French banks have such huge
exposure to both hedge funds and CDS, sometimes linked together, that the positions are beyond the ability of the EU governments to bail them out without a cessation of CDS payments.
Even
a ten years write down will not help. The numbers are just too big.
Still, calls to eliminate CDS and other derivatives by IRS or me are
regarded as fringe or lunatic.
But now a really big investor joins the small chorus. Gao Xiqing is
president of the China Investment Corporation, which manages $200
billion of the country’s foreign assets. James Fellows recently interviewed him for The Atlantic. Gao Xiqing opinion on derivatives (which includes CDS’):
If you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullshit. They are crap. They serve to cheat people.
…
I think we should do an overhaul and say, “Let’s get rid of 90 percent of the derivatives.” Of course, that’s going to be very unpopular, because many people will lose jobs.
Gao Xiqing has some additional good advice for the U.S. and I recommend that you read it.
But back to the CDS problems. If Congress fails to bailout those three
gargantuan hedge funds with the attached car manufacturing and sales
departments we will see an unprecedented rout in the financial markets.
There are
at least 13,602 CDS contracts with a total dollar value of $100,6
billion written on GMAC LLC, General Motor’s finance arm. There are
more than 9,683 contracts on GM itself. A GM bankruptcy would trigger a
payout demand of the insurance bought with CDS’ against such a GM/GMAC
default. It is unlikely that those liabilities could be matched by the
original writers of these insurances. A chain reaction of huge defaults
would follow.
Senator Dodd touched the issue in yesterdays automaker hearing in Congress:
"The domestic auto companies already comprise more than 10 percent of
the high-yield bond market and one of the largest sectors in leverage
finance for banks," Dodd said at the first of two days of congressional
hearings on whether Congress should return next week to provide
automakers immediate aid. "A
partial or complete failure of the
domestic automobile industry would have ramifications far beyond
manufacturing and pensions. It would affect virtually every sector of
the economy."
A default by one of the big threes would be directly bad for the
real economy. But the consequences in financial markets and the
indirect damage in the real economy triggered by that financial turmoil
are the really grave threat.
A solution to that would be to eliminate the crazy Ponzi scheme that
was build with CDS and related derivatives by simply voiding them. But
the economic pain seems not yet big enough to make that happen.