It is now certain that General Motors will end up in bankruptcy. The last days six of the top GM executives sold all the share they still held.
The bankruptcy is unnecessary. Out-of-court restructuring would be much less disruptive than a bankruptcy will be. But there are people who will profit immensely when GM goes bankrupt. As the Financial Times reports (alt. link):
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 offsetting positions are considered, the DTCC estimates CDS holders would make a net profit of $2.4bn if GM were to default.
What again is the social value of credit default swaps?
They have none. These 'financial innovations' are alien to the system and contrary to the the public interest. They need to be abolished by declaring them null and void.