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Tuesday, August 05, 2008 2:57 PM


Default Risk on GM, Ford, Chrysler Hits 95%; Automakers Ask For Taxpayer Handout


Bloomberg is reporting Auto Industry Default Risk Soars to 95% on GM, Ford.

One of America's three biggest automakers is almost certain to default within the next five years, according to UniCredit SpA analysis of the market for credit-default swaps.

Contracts to insure $10 million of General Motors Corp. debt cost a record $4.7 million upfront plus $500,000 a year, indicating an 84 percent chance of default, while Ford Motor Co. has at least a 75 percent risk, according to UniCredit data. Combined with Chrysler LLC, the probability that one of the three will be unable to fund its business is more than 95 percent.

Contracts on Dearborn, Michigan-based Ford, the second- biggest automaker, cost $3.9 million in advance and $500,000 a year. Credit-default swaps on Auburn Hills, Michigan-based Chrysler loans are $1.9 million upfront and the annual $500,000 charge, UniCredit prices show.

"There might be a default at any time," said Jochen Felsenheimer, the Munich-based head of credit strategy at UniCredit, Europe's fourth-biggest bank. "The costs imply there is close to 100 percent probability that one of the big three will file for Chapter 11 bankruptcy."
Auto Sector Credit Default Swaps



Click on chart for sharper image.

The above chart is thanks to Chris Puplava at Financial Sense.

For more on Credit Default Swaps
Pimco: What Are Credit Default Swaps and How Do They Work?
Wikipedia: Credit Default Swaps
CBOT: CDS Example

Automakers Want A Handout

There is no way GM or Ford can raise money in this market. The "solution" of course is to ask for a taxpayer bailout just as Fannie Mae received. Indeed, the Detroit 3 ask up to $40 billion in loans.
Detroit's three automakers are urging Congress to make as much as $35 billion to $40 billion in low-cost loans available during the next two to three years to assure that the companies survive long enough to retool and build a new generation of fuel-efficient vehicles.

Chief executives Rick Wagoner, Alan Mulally and Robert Nardelli -- of General Motors Corp., Ford Motor Co. and Chrysler LLC, respectively -- talked Friday and agreed that access to capital is their most critical short-term need during this volatile period of high fuel prices and slumping SUV and truck sales, sources told the Free Press.

Top lobbyists for GM, Ford and Chrysler followed up Sunday with phone calls to leaders of Michigan's congressional delegation -- including U.S. Sens. Debbie Stabenow and Carl Levin, plus Reps. John Dingell and Sander Levin -- to drive the point home. All three Detroit companies are hemorrhaging cash and having trouble borrowing.

On Monday, Democratic presidential candidate Barack Obama proposed $4 billion to help Detroit's automakers build the cars of the future. Obama's advisers called it a first step.

It's unclear exactly how much help the Detroit Three will need, but sources at the companies and the congressional offices told me Monday it may well be twice as much as the $20 billion that was being discussed just a month or two ago.

If these companies don't have access to money at reasonable interest rates, they won't survive long enough to worry whether they can meet the fuel-economy standards of 2020 or 2030.

It's that serious.
Yes it's serious. It's serious how much money is being thrown around. And none of it will help. GM, Ford and Chrysler are pathetic basket cases, but so are many banks and financial institutions. And the best thing for basket cases is to let them go bankrupt.

Keeping weak institutions alive at taxpayer expense cheapens the dollar and deprives other more legitimate businesses the capital they need. This is one of the things that prolonged the Japanese deflation for what is now known as "The Lost Decade".

Does this mean massive inflation is coming? No, it doesn't. The destruction of capital is happening at a far greater pace than money is being thrown around. Inquiring minds may wish to consider Yes, That's $2 Trillion of Debt-Related Losses, a Barron’s Interview and Video with Roubini.

So Obama asking for $4 billion for GM is a drop in the bucket compared to $2 trillion in writeoffs. So is the $150 billion "stimulus" package. Yes there will be more and more stimulus packages and every one of them will be a waste of money. And just as happened in Japan, the total of these stimulus packages will not match the destruction in credit and lending at banks and financial institutions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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