Today I got a question from a friend of mine. He asked me what would happen if C, AIG and GM go under, and my first line of response was 'we are fucked for the next 2-3 years'.. I asked Bill the same question just to check whether he has any different opinion.. Nope..
Well, though i think GM is not as BIG or as SERIOUS as an issue as C or AIG going under, it will have a serious impact on the ecoonomy. Though in longer run it is good for F and Chrysler (provided they survive; F will definitely see the light, considering the fact that it didnt BEG for any bailout money, and that it is in talks with its debt holders to restructure the debt), it is not as good for the auto part compnaies, car dealers, car rental companies and for institutions that hold GM's debt. In my previous post, I mentioned that over the past three years, big banks like Bank of America, Citigroup and JPMorgan Chase helped the automakers sell more than $56 billion of new debt securities. That figure does not include $47 billion of risky loans made to various affiliates of Chrysler, Ford and G.M. In another post, I quoted a study on what-if scenario of all the three car makers go bankrupt. (3M job losses, 400bn loss of personal income in 3 years, 150 Bn in tax losses to US govt in 3 years). If it were GM alone, a simple math of dividing the numbers by three would give a vague idea.
AIG: Well, the problem with AIG is that it deals with Insurance, on institutions credit in the form of Credit Default swaps. Much worse is that fact the AIG mostly SOLD the insurance. When the economy is good, companies dont go belly up, or the chances of any compnay defaulting its debt would be low, providing a steady revenue stream for AIG, in terms of insurance premiums. When things go bad, AIG has to pay the debt to the insurance holders incase of a default. If a firm buys and sells the insurance, the effect would not be as much as it would be with a single mode exposure.Given that, AIG cannot go under, as it would expose a huge counterparty risk and would lead to many other firms writing down or going under. It is the same reason why Mr. Kohn, Fed vice-chairman, declined to make public the counter parties of AIG.
Quote:
“You are telling us that the counterparties that got par for their bonds or for whatever — the American taxpayer shouldn’t know who they are? And then you may come back to us and ask for more money for more banks and more corporations? You will get the biggest ‘no’ you ever got.” Jim Bunning, the Republican senator from Kentucky, when Fed vice chairman, Donald Kohn declined to make the counterparties public.
C: it is simply too BIG to fail.
I rest my case.. and yes, we would be in deep shit for the next 2-3 years (4-5 years would be a stretch) if any one of or all of the above events happen!
Hedge funds: There’s a big hole in the hedge fund industry, as nearly $1 trillion in assets has disappeared over the last six months of 2008, according to a study. And I sit here and wonder whether to feel good to be STILL working for a hedge fund, or to regret for the same!
Citi for a brief period traded below a dollar!! A DOLLAR??? Every time it gets below 1 buck, it is a screaming BUY.. but a risky one though.
No comments:
Post a Comment