Should GE be a AAA company?
The latest news in bailouts involves GE Capital. Apparently, the company has gone begging to the FDIC for a bailout. In fact, the FDIC has offered to back $139 billion in GE Capital debt. I have serious reservations about this move by Sheila Bair. In fact, I am outraged.
First, as I understand it, the FDIC has much less than $139 billion in capital on hand. And they have hundreds of banks to watch that are busy going broke. So, how is it possible that they can guarantee GE Capital’s debt? The answer is they cannot. American taxpayers are what is behind this move just as they were with Fannie and Freddie – not that we will get stuck with the bill as GE is not going under, but the FDIC certainly can’t pay. (UPDATE: a reader who writes the blog “Skeptical CPA” is not so sanguine about GE and passed on a post he wrote doubting GE Capital’s funding model.)
Second, how is GE a AAA company? As I understood it, AAA means bullet-proof, high quality, or excellent. If a company needs the support of the government, it is not possible to be considered AAA. Do you see Berkshire Hathaway going cap in hand to the government for a bailout? As a matter of fact, Berkshire assisted GE Capital by buying preferred shares at a steep price, which allowed the company to raise billions in capital. The difference is striking.
Third, GE Capital isn’t even a bank.** The FDIC only deals with depositary institutions. Are you kidding me? The U.S. Government is obviously willing to do anything to bail out financial institutions at this point. Forget rules and regulations. Just give them the money.
G.E.’s AAA rating is a sham.
General Electric said Wednesday that the federal government had agreed to insure as much as $139 billion in debt for its lending subsidiary, GE Capital. This is the second time in a month that G.E. has turned to a federal program aimed at helping companies during the global credit crisis.
GE Capital is not a bank, but granting it access to a new program from the Federal Deposit Insurance Corporation may reassure investors and help the lender compete with banks that already have government-protected debt, a G.E. spokesman, Russell Wilkerson, told Bloomberg News.
“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Mr. Wilkerson said.
The F.D.I.C. program covers about $139 billion of G.E.’s debt, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30.
F.D.I.C. to Back $139 Billion in GE Capital Debt – Deal Book
**UPDATE 17 Nov 2008 – 1700 ET: GE Capital actually is a bank. I have a new post addressing this correction here.
It’s a compulsion to do something, anything to stop an out of control downward spiral. The Hoover and Roosevelt administrations acted much the same. Here’s a link to a post I wrote a couple of weeks ago with an embedded link to a WSJ editorial that does a much better job of explaining why the mania for action can be so self-defeating.
Tom, thanks for the input. I read your post as well. Do you really think we can avoid depression? I’d love to hear your take as to why. I thin we could but it is looking ever more unlikely.
Good post. GE has not been a AAA institution for a decade, and their plenteous debt has traded more like a single-A security than a AAA. Their finance arms traded even worse. (AIG was similar.) The bond market often ferrets out what the rating agencies miss. (Sometimes the converse is true as well.)
As for the comments on the Depression, here are links to two of my recent posts.
https://alephblog.com/2008/11/08/financial-dominoes/ (sorry, three)
We’re in a pickle. What’s worse, our leaders are pursuing strategies that will have marginal value at best.
David, good posts. And also, I appreciate your mentioning bond market spreads. I used to work on a bond trading desk so I know exactly hat you are saying.
Credit spreads show that market participants often signal that they believe certain credits are not worthy of their rating long before they get marked down. If you look at Enron, the bond market was on to this well before the equity markets. I believe the same was true for Worldcom.
My hope is that all of this turmoil will lead to something positive in terms of risk taking and compensation. GE is certainly a respectable company, but they have had a poor funding model for quite a while now. GE Capital, much like private equity shops, is an organization that should probably be reigned in.
For what it’s worth, GE Capital is bank holding company with two depository institutions. It includes both a traditional bank (GE Money Bank — go to https://www2.fdic.gov/idasp/main.asp and search for FDIC certificate number 27314) and an industrial loan corporation (GE Capital Financial).
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