I didn’t think of that

Robert Waldmann

JimLuke argues that GM will almost certainly go bankrupt because …

there may be thousands (perhaps even millions) of seperate bondholders, the vast majority have no voice in the negotiations. Instead, there is a “bondholders’ committee”. Who is on the committee? The “experts” and the large bondholders: primarily banks and bond funds. These banks and bond funds presume to speak for all bondholders. But their interests are not in line with all bondholders. We know that there are very large number of outstanding Credit Default Swaps (CDS) contracts on GM. So who likely holds the CDSs? The very same large banks and bond funds that are negotiating. So, in effect, if GM goes BK, then the bondfunds/big banks are hedged and get full payment via the CDS. If they agree to a restructuring, they get less than full payout. So there’s no chance they’ll agree.

I fear he’s right about CDS contracts, that the writer doesn’t have to pay the CDS holder if there is a “voluntary” restructuring. The CDS writers aren’t on the committee.

update: From comments

JPKK says:
Today, 3:21:07 PM
“Most CDS have a modified restructuring clause in the US, which allows for the delivery/cash settle based on bonds within a window of the same maturity as those that were restructured (principle reduced, payment reduce, maturity extended). The reason for modified restructuring revolves around a case where Household restructured some short debt, but it in no way had an affect on long bonds, but under vanilla restructuring CDS holders were able to delivery long bonds which were discounted due to rate changes.

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