Like the elephant in the living room, the decline of General Motors is a problem that investors don't want to think about but can't ignore.
The world's largest automaker, whose debt is close to the gross domestic product of Belgium, lost more than $10 billion (£5.7 million) last year and is facing a bankruptcy that would reap devastation in the world's financial markets.
GM's share price has halved in the past year, while its $100 billion of bonds have been cut to junk, confronting investors with the prospect of never getting their money back. "A GM default would be absolutely huge," said Jonathan Loredo, of credit manager Cairn Capital. "It would be the biggest thing to hit the market."
There is no understating the scale of GM's problems. It is losing market share in the United States, has $300 billion of long-term debt, provides health benefits to 1.1 million people (at the rate of about $1,500 per car produced), is threatened with a strike by its largest supplier Delphi, which is bankrupt, and is being investigated by the Securities and Exchange Commission.
Few who invest do not have some level of exposure.
GM, or its financing arm GMAC, is present in around 65 per cent of synthetic collateralised debt obligations (CDOs), according to Standard & Poor's, and underlies an estimated $1 trillion of default swaps.
All that for a company with a market capitalisation of $12.8 billion (£7.3 billion).
Still, investors struggle to judge whether the automaker, which sells 21 per cent of cars in the United States, will ultimately perish.
"A bankruptcy filing is unlikely this year," said Christophe Boulanger, auto analyst at Dresdner Kleinwort Wasserstein. "Unless Delphi goes on strike - in which case it would all be over."
Parts supplier Delphi, which filed the biggest bankruptcy in US automotive history in October, is negotiating with the United Auto Workers union and GM over wage and benefit issues, with a strike threatened if there is no settlement.
Should a strike be called, GM could be bankrupt by June, Mr Boulanger said. After that any scenario might play out, but the status of GMAC will be crucial.
GMAC has traded at a premium to its parent in the credit markets on hopes a controlling stake will be sold, ring-fencing the company and possibly returning it to investment grade. Yet, despite GM's best efforts, no buyer has emerged.
Further complicating the outlook, if GMAC is not sold, and GM does go bankrupt, it is uncertain GMAC would be consolidated in the filing.
For bond investors, a GM bankruptcy would be hard, but a GMAC bankruptcy would be disastrous. GMAC is home to three quarters of the group's bonds.
"To be blunt - it would be carnage," one London-based hedge fund manager said.
Of course, the best possible outcome may also be the most likely. That is, GM will survive.
Having spent around $15 billion (£8.6 billion) renewing its product offering, it is certain the company will do everything in its power to avoid bankruptcy, Mr Boulanger said.
There are positive signs on negotiations with unions, a cap on salaried retirees' health care at 2006 levels, and 30,000 job cuts planned.
Further, the precedents are good. In 1980, Chrysler stepped back from the brink, while Nissan performed a similar feat 20 years later.
It is probably investors who are best placed to judge GM's prognosis, and the cost of one-year default protection on GM is currently higher than five-year protection.
In other words, if the elephant is still in the room in 18 months, you can probably ignore it. ..SUPL:
