Today in GMAFB: The WSJ on GM CDS

Yesterday the Wall Street Journal, a paper that in recent times would have been readily seen as the paper of record in securities trading ran a headline that topped out my tolerance for GMAFB with “Wall Street Bets on Debt That Doesn't Exist”

If you are looking for pageviews that is a fantastic headline. The evil lunatics on Wall Street are at it again! Constructing derivatives (those are scary) on phantom debt that doesn't even exist. Somebody call The Hardy Boys. The article starts with, que the Vincent Price voice over “Fresh from Wall Street's alchemy labs: Credit derivatives tied to General Motors Co. debt. The rub is, no such debt exists.”

In the next paragraph however, the article glosses over why they are fundamentally wrong. “(GM) has pledged to cut its remaining $4.6 billion bank loan to the bone this year.” Apparently this debt that they recognize and that GM has expressed a desire to cut, is non material and unimportant. This is merely a technicality for the for journalists that find it more pressing to scare up hits than to actually understand the topics upon which they decide to opine.

Here is a look at General Motors current debt structure

GM Debt Structure

As anyone can see General Motors has debt outstanding through: bonds issued by foreign subsidiaries, bank loans, and a 5.1 billion dollar revolver. On 5.9 billion in debt outstanding 750mm in CDS volume over the course of a quarter is high, but hardly newsworthy.

It mentions that these obligations do enter the picture but “it is unclear whether the contracts would cover their debts.” Here is an idea about as to how one might clear up that matter, why not try reading the contract? It spells out the structure of the protection and precisely what relevant instrument upon which they are offered. In this particular case it is senior secured debt. The very debt they discussed, but which they also claim does not exist.

The article then goes explain how AIG and Lehman Brothers could be blamed on CDS because that is that another fun way to make this look like it's an issue when clearly that is not the case. I know I may well be fun to get your article emailed around for a day but it is dangerous and disingenuous to stir up public ire with a misleading and poorly researched article about markets upon which people's livelihoods depend.

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After posting this I realized that Felix Salmon at Reuters has an article on the subject that goes further into the explanation of why the market for these particular CDS exists and parallels a many of the questions on why the WSJ article was written in the first place. It is absolutely worth a read.