Wednesday, March 04, 2009

GE "Bezzle" Revisited: Ask WHO?

Yesterday we mentioned that someone was 'buying GE down.'

Here's how it works:

I buy a CDS on GE (a few weeks ago) for a couple hundred basis points ($200,000 per $10 million)

The SELLER of that CDS protects against possibly having to pay by shorting whatever he can against that short credit position. This means he buys PUTs, he shorts the common, he does whatever he needs to in order to lay off that risk. He does this because if GE goes bankrupt their stock would presumably go to zero; therefore, if he has a potential $10 million exposure on the CDS he will short $10 million face value of the common stock, or buy enough PUTs to pay him $10 million if the stock goes to zero.

The PUT writer (assuming he buys PUTs), being a market-maker, will in turn short the common to lay off the risk as well.

This hammers the stock price which then reflects into the pricing models for the CDS, driving them higher.

This cycle repeats;

One year ago, GE was at $33. and change. Now it's about $6.00.

Fuggedabout your mom's pension (or the OTHER zillions of pension funds) which are now losing their butts on GE common. Fuggedabout the challenges GE will soon have in financing its operations as equity swoons.

Instead, ask THIS question:

Cui Bono?

Who benefits if GE tanks?

And who has the swing to push so much cash across the table to effect this stock-drop?


UPDATE: The Badger covers this thoroughly, with explanatory text.


Jon Anne Willow said...

Is there a way to subscribe to your blog? I can't even find an email address for you here. :)

Dad29 said...

I'm not a technocrat...sorry.

I think that one can use the common "feeders" to be notified of new posts.

Or (easier) simply put it into your favorites and check in once/day.

Since I am a controversialist, I don't publish my email address. I have children who should not be punished...

Anonymous said...

I, and several hundred thousand other employees, would also like to know.

asianbadger said...

You should clarify that a CDS is a "Credit Default Swap".

Easy explanation here:

Frankly, that was a terrifying article. But spot on.

asianbadger said...

Eh...sorry...the Wiki goes into more detail than I intended...Also, I mis-clicked.

Easy explanation here:

Shoebox said...

With my tinfoil hat firmly settled on my head......The govt still isn't saying where they are putting thier money are they?