GM failure already priced in by credit market: Citi

By Walden Siew

NEW YORK (Reuters) - A default or bankruptcy of General Motors would have little impact on credit markets because the risk of failure by the automaker is already priced into the market, a Citigroup director said on Friday.

In contrast to Lehman Brothers, which collapsed practically overnight, the troubles at GM, the largest U.S. automaker, have been years in the making.

Investors and dealers already have priced in the risk of any failure based on trading of GM bonds and credit default swaps, said Marc Heimowitz, a director at Citigroup Global Markets.

"A GM failure would have very little effect on the CDS market," Heimowitz said at a distressed investment conference in New York. "It's been a slow, big car wreck. Citi has already marked our books, other dealers have marked their books. The incremental loss is not that large."

Large hedge fund failures may be the next threat to counterparty risk and stability to credit markets as the risk of more major bank failures fades.

Since Lehman Brothers filed for bankruptcy in September, dealer counterparty risk in the credit default swap market has fallen, said Heimowitz.

"There's the perception that the government will not allow another bank to fail," he said. However, the risk of a large hedge fund failing is rising.

Other panelists at the conference, sponsored by Financial Research Associates, said the bailout of American International Group Inc, once the world's biggest insurer by market value, was needed to prevent systemic failure in capital markets, yet it set a dangerous precedent.

AIG suffered billions of dollars in losses stemming from credit default swaps that were linked to subprime mortgages.

The company lost nearly $24.5 billion in the latest quarter, and about $18 billion over the three prior quarters. Over the same period, the company's stock market value has crumpled to about $6 billion from around $155 billion.

Unlike Lehman, AIG averted bankruptcy in September with an $85 billion federal bailout. On Monday, the U.S. government raised its total support for AIG to $150 billion, and AIG now has to sell assets to repay $60 billion of that debt.

Peter Kaufman, head of restructuring at Gordian Group LLC, compared AIG to Charles Dickens' Oliver Twist, begging for more handouts.

"AIG keeps coming back to the government and keeps asking, 'Please sir, may I have more?'" Kaufman said, noting growing pressure for similar bailouts of U.S. automakers. "Where does this end? AIG wasn't allowed to fail because of the CDS black hole. Where do we stop the tail wagging the dog?"

For investors, the market volatility and global financial crisis may usher in a new era for distressed investing, said Bruce Ferguson, managing partner at Apex Fundamental Partners: "We are on the cusp of the investment opportunity of our lifetimes."

(Editing by Leslie Adler)