friday trading, page-100

The problem with the Auto Companies if they fail is what is their counterparty exposure and who are they??

Who knows who has exposure to who when it comes to non exchange traded OTC derivatives. Someone could have placed a massive bet that GM would go bankrupt as insurance to cover their exposure and if they do indeed go bankrupt someone out there needs to meet that obligation. If they cant, they go bankrupt and then another company with exposure to new company that gone belly-up requires to paid out and so on. It goes on an on like a snowball effect.

While I dont think that the collapse of GM or Ford will have significant effects on credit markets like Lehman did, the effects on the real economy in terms of jobs not only through the job losses at the companies in question, but also on parts suppliers and other associated industries will be massive. This will not be limited to only the US but to the Global economy.

Dont forget the physiological impact of one of these companies going down either will play on the markets and the general populace. GM and Ford survived the Great Depression, failure now would signal to people that we could be going through something even more catastrophic than that period of history.

If the bailout doesnt get passed, the DOW will plummet. We are at a significant turning point here, if they go down, then its a full on global depression, if they get bailed out then its a severe recession.