GE Capital’s looming time bomb
I do not think General Electric is AAA company — far from it. Their finance arm GE Capital is at the center of the private equity and asset-backed security time bombs that have yet to explode. And this makes the cash flow expected from GE Capital vulnerable because they are under-reserving. Translation: their financial results are artificially goosed by not reserving for likely losses.
In previous posts I have argued that GE must cut its dividend and that it will lose its AAA credit rating, despite an investment by Warren Buffett. The following video which focuses on the under-reserving at General Electric demonstrates why.
I have reasonable knowledge of GE Money (non-US) and it is a hugely flawed business model. Cheap yen funding (hard to hedge) from AAA rating then lent to people banks don’t want to lend to (that’s saying something!). I wouldn’t mind betting that accounting earnings have been far in excess of true cash earnings as there are so many upfront or non-performance fees/insurance associated with it’s products. Not only will some of these fees will dry up with far lower origination amounts many of the non-performance fees (some accounted for) probably won’t be repaid. Throw in skyrocketing bad loans and higher funding costs and it all starts to look real ugly.
GE is a house of cards. Phoney money on the books backed by phoney loans. Equity investors get out. Debt holders get out.