Dealers and hedge fund managers were scrambling to unwind short auto positions as DW went to press on Friday, following Standard & Poor's downgrade of General Motors Corp. and its related entities to junk status on Thursday. Ford Motor Co. was also downgraded one notch to BB plus. Wall Street players said the major derivatives houses share high exposure to the names and could see significant losses. GM and Ford are both top referenced entities in structured credit and it is hard to estimate the collateral damage of their downgrade. One credit-default swap trading head at a bulge-bracket firm said it has been forced to look at exiting GM positions. "This will be a telling year in credit," he noted.
The sting is being felt on both sides of the Atlantic, as trades that seemed sound only a few weeks ago have been losing money. Funds in Europe only last month bought up about USD1.5 billion of a GM 2033 euro-denominated bond and as a hedge, shorted GM stock. The funds would have hedged this by buying put options, but those instruments are not liquid in the 30 year range. The result has been the funds losing on both legs of the trade. The equity jumped on the offer by billionaire Kirk Kerkorian to buy a sizeable GM stake and the bond value was tumbling even before the downgrade. It could not be determined if U.S. hedge funds had a similar play, but anyone holding equity tranche positions was also looking for an escape route last week (DW, 5/2). "A lot of trades that seemed really smart have just been imploding," said one hedge fund manager.
