Friday, April 3, 2009

GM 5 Year Credit Protection Costs More than Underlying Debt

Credit coverage (via credit default swaps) for $10 million in GM debt costs $10.3 million over 5 years. An upfront payment of $7.9 million is followed by an annual fee of $500,000 a year. That's more than the underlying debt.

Citi's CDS's reached a record level this week. Meanwhile, the New York Federal Reserve Bank recommended banks reduce their exposure to credit derivatives. Does that mean Uncle Sam or the Fed will take over future credit bombs?