GM (GM) has 58 days to negotiate to convince bondholders to take a major haircut or debt-for-equity swap. But it doesn't sound like it's going to happen.

Why not?

Because the bondholders don't seem interested in taking the ridiculous haircut that would be necessary for GM to be viable.

Why won't they take this haircut? Because many of the same bondholders presumably own credit default swaps on GM debt with AIG. And the US government has already made clear that it will cover those CDS's at 100 cents on the dollar. In other words, if GM goes bankrupt (defaults), the bondholders may be assured of getting all their money back!

Karl Denninger explains:

The government has provided a history now that says that if you are a holder of CDS written by AIG, you will get 100 cents on the dollar, even if the notes don't default. In addition that 100 cents is above what you would normally get even if there IS a default, because normally you have to tender the defaulted bond or the payout is limited by the recovery, and recovery on a defaulted bond is almost never zero.

So in this case the winning play, if you're a big bondholder, is to tell GM to suck eggs; you'll get paid 100 cents on your CDS even though AIG has no money, because the taxpayer will make you whole on those CDS, even if the bonds have a recovery in bankruptcy.

In other words you could conceivably get more than 100 cents if you hold those bonds - so long as you also hold a CDS as a hedge.

It must be nice to be able to screw the taxpayer for more than a 100% payout, right?

The bondholders "committee" is all made up of big players who presumably are hedged, ergo, this has to be assumed to be part of their "thought process" - if not the controlling factor.

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