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?

Hmmmmm?

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