Tell me again what a triple-A rating is good for? Not a whole lot, if one of the iconic triple-As in American industry, General Electric, has to go hat in hand to the federal government for a $140 billion bailout.
Or maybe G.E. isn't the bulletproof financial juggernaut the rating agencies say. The company's vaunted GE Capital unit has supposedly been a money machine for years, having generated solid returns come rain or shine. By now, the unit generates upwards of 40% of G.E. overall profits.
Except there's one problem: G.E.'s financial services business may be the blackest box on Wall Street. The unit has little transparency, no regulatory oversight, and now, we are finding out, an unstable funding model.
In particular, G.E. has chosen to fund its finance business with short-term commercial paper rather than secure more stable long-term funding based on its triple-A rating--which, it appears, turns out to be fiction.
Odd, isn't it, that even though it operates in the same economic environment as regulated financial behemoths, G.E. never seems to get hit by outsized credit losses or asset writedowns? Is that because a) the people at G.E. are just smarter than everybody else, or b) the company has wide latitude to paper over problems since it doesn't have a regulator looking over its shoulder?
I vote for b. We know, for instance, that GE is not above skimping on non-cash discretionary items in order to plump up its near-term results. And not in a small way, either: one reason Jack Welch could show such sparkling earnings gains toward the end of his tenure as CEO is that in the late 1990s and early 2000s, G.E. systematically underreserved for losses at its reinsurance unit. When the company sold the business in 2005, it had to pump in an extra $10 billion to make up the shortfall.
Opaque assets and unstable funding. That's some combination. In any event, yet another pillar of the "shadow banking system" founders.