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Reuters reported that a US bankruptcy judge gave General Motors Corp (GM) permission on Monday to buy several assets of another bankrupt company, Dephi Corp, an auto parts supplier as part of a deal with a private equity firm that could take Delphi out of bankruptcy. How ironic. A bankrupt helping a bankrupt to get out of bankruptcy.

Judge Robert Gerber of US Bankruptcy Court in Manhanttan gave “Old GM”, now known as Motors Liquidation Corp, permission to buy Delphi’s steering business and a number of its plants, deemed essential to GM’s ability to build cars.

Delphi is by far GM’s largest supplier, accounting for about 11.3 % of its purchases in 2008.

If GM’s partner in the bid for Delphi, private equity firm Platinum Equity, won the auction for Delphi that is set for later this week, “New GM” or General Motors Co – which emerged from bankruptcy last Friday after the carmaker sold the bulk of its best assets to a US government-led group, paid by taxpayer money – would reimburse Old GM and receive the Delphi assets.

Old GM, which now consists of the remainder of the automaker’s assets, remains in bankruptcy court. Delphi, which was spun off from GM in 1999 (parents helping its kid?), filed for bankruptcy in 2005, said last month that it had reached a deal to sell most of its global operations to Platinum, in a plan that with the participation of GM would allow Delphi to emerge from Chapter 11 bankruptcy.

In a court document, GM had said it expected the transaction to cost US$3.9 billion, including a payment of US$1.1 billion to Delphi’s creditors (probably the same creditors for GM?) and a US$2 billion equity stake in Parnassus, a unit of Platinum, which has submitted the only bid so far to take Delphi out of bankruptcy.

Platinum would invest US$250 million in Delphi under terms of the plan. But the deal still has to get approval from the judge overseeing Delphi’s bankruptcy.

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In an article I read, Soros called credit default swaps as instruments of destruction. Below is part of the article:Soros said the asymmetry of risk and reward embedded in CDS exerted so much downward pressure on the bonds underlying the contracts that companies and financial institutions could be brought to their knees.

“Some derivatives ought not to be allowed to be traded at all. I have in mind credit default swaps. The more I’ve heard about them, the more I’ve realized they’re truly toxic,” he told a banking conference.

“CDS are instruments of destruction which ought to be outlawed,” Soros told a meeting of the Institute of International Finance, many of whose member banks and financial institutions are active participants in the huge CDS market.

Going short on bonds by purchasing a CDS contract carried limited risk but almost unlimited profit potential. By contrast, selling CDSs offered limited profit and practically unlimited risk, Soros said.

He said one financial institution that discovered to its cost the risk/reward distortions of CDS was insurer American International Group, which was a big seller of CDS, offering banks protection against a deterioration in their bond portfolios, especially mortgage-linked securities.

“AIG thought it was selling insurance on bonds and as such CDS were outrageously overpriced. In fact AIG was selling bear market warrants and it severely underestimated their value,” Soros said.

But the potential damage that CDS could do was not limited to financial firms, Soros added. He pointed to the bankruptcy of North America’s largest newsprint maker, AbitibiBowater Inc, and the pending bankruptcy of General Motors”In both cases, some bondholders owned CDS and they stood to gain more by bankruptcy than by reorganization.

“It’s like buying life insurance on someone else’s life and owning a license to kill,” he concluded.

Soros’ criticism echoes fellow investor Warren Buffet’s description of derivatives in 2003 as “financial weapons of mass destruction.”

On derivatives in general, Soros said they should be as strictly regulated as stocks.

He said derivatives should be standardized and saw no case for custom-made derivatives, which he said only increased the profit margins of the financiers who tailored them.

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General Motors Corp on Monday offered its final plan to reorganise outside bankruptcy by slashing bond debt, cutting over 21,000 more US jobs and emerging as a nationalised automaker under majority control by the US government.

GM chief executive Fritz Henderson said the automaker would file for bankruptcy protection if an offer to exchange bonds for company equity failed to cut US$27bil in bond debt by about 90% or other changes faltered.

Analysts doubted the debt exchange offer would succeed, setting up GM to restructure in Chapter 11.

GM’s bondholder’s blasted the terms of its debt-exchange as a back-room deal designed to protect the interests of its major union the United Auto Workers, a group that campaigned for President Barack Obama in last year’s election.

Representatives of the bondholders said GM and the Obama administration were gambling on a risky and “legally questionable” strategy for a company that once ranked as an icon of American industrial and economic strength.

The White House said on Monday the US government had no desire to run a domestic automaker despite the potential controlling interest.

“We strongly back an auto industry that we believe can and should be self reliant,” White House spokesman Robert Gibbs told reporters. “It is not our desire to either own or run one of the auto companies.”

GM’s new strategy, which will also jettison the Pontiac brand and shut down production of Saturn brand cars this year, underscored how quickly and far it has fallen since last summer when executives, including Henderson, were insisting that the automaker could restructure under a programme of “self help.”

Separately, Chrysler lenders were expected to receive a new offer from the US Treasury as early as Monday in the wake of cost-cutting deals the US automaker has reached with unions in the United States and Canada.

Chrysler faces an April 30 deadline to reach a deal with creditors and cement an alliance with Italy’s Fiat SpA and continue to receive US government emergency support.

The automaker was working “diligently” to complete the Fiat deal and restructure its business by the deadline and maintain government emergency loans, Chief Executive Bob Nardelli said in a memo to staff obtained by Reuters.

Chrysler cleared another hurdle in its reorganisation on Monday when Daimler AG reached a deal to divest the nearly 20% stake it had held since selling Chrysler to Cerberus Capital Management LP in 2007.

Canadian Industry Minister Tony Clement said it was now more likely Chrysler would not have to go into liquidation following an agreement with the Canadian union that Fiat has concluded is cost-effective. – Reuters

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