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What Detroit Owes Wall Street

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A bankruptcy by General Motors could put the big five Wall Street banks and other lenders on the hook for billions in losses, though with the government calling the shots over the finance and auto industries, it may be tough for the banks to take a hard line as creditors.

Speculation intensified Tuesday that GM was inching closer to filing for bankruptcy, and its shares fell 13% in midday trading. Last week, the Obama administration gave the company 60 days to come up with a better turnaround plan, including extracting better concessions from unions, creditors and bondholders.

Moody's Investors Service put the likelihood of a GM bankruptcy at 70%. "Given the lack of progress achieved and the additional progress that will be required in the revised plans, this threat will need to be seen as credible in order to compel adequate movement on the part of stakeholders," said Moody's analyst Bruce Clarke. He has had the same dim view since late last year.

GM's biggest lenders will have to play ball, according to analysts. Already, Ford Motor managed to convince its creditors to swap $9.8 billion of debt for equity, reducing its debt 28%.

Banks, like the automakers, are huge recipients of government money under the $700 billion Troubled Assets Relief Program, and lately the government has been not-so-subtly reminding them that they have a responsibility to lend and heal the credit markets.

"It appears that politicians will hold TARP over the heads of recipients, forcing them to make bigger concessions than they normally would, including swapping debt for equity," says Fox Pitt Kelton Cochran Caronia Waller analyst David Trone.

The extent of actual losses from a GM bankruptcy are hard to calculate, since the banks don't disclose individual exposures they hold and since much of the loan exposure has likely been sold into the secondary market or hedged.

Any direct lending losses would result from a breakdown in those hedges, says Sanford Bernstein analyst Brad Hintz. The banks "have seen this coming. It's been a long, slow-motion train wreck."

GM has had a revolving credit and a term credit of $6 billion since 2006, arranged by Citigroup , JPMorgan Chase , Bank of America and Deutsche Bank , according to data from Thomson Reuters. Thirteen other banks participated in the original syndication, including Goldman Sachs , Merrill Lynch and Morgan Stanley .

The big banks have exposures beyond those mammoth corporate loans. Bank of America's exposure to the auto industry (not just the manufacturers) is about $9 billion, according to Fox Pitt Kelton research, $6 billion of that in loan commitments. That's 1% of the bank's loans. Citi has $12.7 billion of loan exposure to the troubled industry, including an estimated $12 billion related to dealers and suppliers, Fox Pitt calculates. That's 2% of Citi's loan portfolio.

JPMorgan Chase's auto industry loan exposure is $9.7 billon, or 1% of its loan book, most of that related to dealers and suppliers but $1.8 billion of it related to "criticized auto exposure," meaning loans that are deteriorating.

A tier down from the biggest banks, Comerica also has exposure that amounts to 2% of its loan book, Fox Pitt estimates, or $4.8 billion. Comerica, which used to be based in Detroit but moved to Dallas in 2007, has $100 million of loan exposure to the Big Three automakers and another $2.7 billion to auto dealers, Fox Pitt said. Bank of New York Mellon has 1% of its loans exposed, including $224 million in secured exposure to two of the Big Three.

M&T Bank has $2 billion exposed to auto dealers; Huntington Bancshares in Columbus, Ohio, has $288 million exposed to the sector; and Synovus Financial in Columbus, Ga., has $200 million.

Any losses at banks depend on the extent to which a government-controlled bankruptcy could blunt the ripple effects that will spread through the dealership and supplier sectors.

GM isn't the only potentially troublesome credit exposure. Chrysler, too, is scrambling to complete its assignment from the government, which is to strike a deal with Italian car maker Fiat . Moody's puts its chances of filing for bankruptcy at greater than 70%.

Chrysler is currently 80% owned by Chicago hedge fund group Cerberus Capital and 19.9% by Daimler AG. The government wants Fiat to take a 20% stake, with the rest doled out to secured creditors, including banks.

Chrysler has a $7 billion term loan arranged by Citi, JPMorgan, Bear Stearns (now JPMorgan), Goldman Sachs and Morgan Stanley for its 2007 leveraged buyout. The banks failed to syndicate the deal but the exposure has likely been sold into the secondary market, analysts said.

Moody's warns stakeholders against playing chicken with a government determined to act aggressively. "Any assumption that the administration is bluffing on the bankruptcy issue and any attempt to call that bluff could be a risky strategy."