Hedge Funds Stand to Make $2.4 Billion Off Of Credit Default Swaps If GM Fails

First was the story of a minority of Chrysler bond holders who drove the company into chapter 11 and now this:

"Hedge funds and other investors stand to make billions of dollars on credit insurance contracts if GM de-clares bankruptcy, a prospect that is complicating efforts to persuade creditors to agree to a restructuring plan for the carmaker, 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.

The opposition of 10 per cent of bondholders is enough to derail the proposal, which has already triggered protests from investors who argue it unfairly rewards the UAW at the expense of bondholders.

"You have every incentive not to agree," said one bondholder, a large credit hedge fund. "You would be locking in a loss if you did. It isn't only the 'shark' capital; it will be the mom and pop mutual funds who will oppose this deal. "

To put this article in clearer terms: Glorified paper-pushers and professional gamblers (aka hedge fund managers) stand to make over $2 Billion should the flagship US automaker, who employs or affects the employment of over 2M middle class workers, go out of business!

How much longer are we going to let Wall Street maintain its stranglehold on the US economy? WAKE UP AMERICA!