General Electric Gets a $140B Bailout - What's the Point of AAA?

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.

Comments

[camy:]

AAA rating is good for qualifying for Bailout Money :)

2008 Nov 14 09:26 AM

[kurt walter:]

GE Capital begging for taxpayer bailout money. Not a good sign for GE. How come Buffett gets GE preferred at 10% and investors weren't given the same opportunity? Instead, they want taxpayer money. All of these companies need to dilute shareholders with common and preferred shares offered to investors, who will take the risk/reward. Going to the taxpayer is not right.

2008 Nov 14 02:25 PM

[Russell Wil...:]

Russell Wilkerson from GE: Mr. Hill, you are missing some fundamental points about GE Capital. Throughout the credit crisis, GE Capital has continuously funded its lending operations primarily through long-term debt. Contrary to your posting, we have not funded most of our business with short-term commercial paper. Less than 15% of GE Capital’s total funding, or about $80 billion, will come from short-term commercial paper by the end of 2008. Additionally, our CP is more than backed up with $62 billion in bank lines, $15 billion in new equity, and cash on hand.

In recent weeks, we have taken steps to remain competitive with other financial institutions. This week, we announced we were approved to participate in the FDIC government program that guarantees debt. This program is not free. It is not a bail out. Like other participants in the FDIC program, we pay a fee to participate. The FDIC will guarantee up to $139 billion in long-term and short-term debt issued by GE Capital through June 30, 2009, but that does not mean we intend to issue that amount. GE Capital is also participating in the government’s Commercial Paper Funding Facility, another positive move to protect our liquidity and that of our investors. While our balance sheet is strong, we would place ourselves at a competitive disadvantage were we not to avail ourselves of these facilities. We are committed to the Triple-A credit rating. This guarantee program will further strengthen our already strong balance sheet and support our rating.

GE Capital provides critical financing for U.S. infrastructure projects, municipalities and industries including airlines, hospitals, utilities, and many middle market sectors. GE Capital has also been a leader in aiding U.S. companies in restructuring. More details about our financial services businesses, our assets, and loan-loss reserves are readily available in our quarterly SEC filings and on www.gereports.com.

2008 Nov 14 03:01 PM

[M dub:]

a) bank funding 101: don't mismatch your book.
b) GE had less revolver backup lines than its CP outstanding. this was knows a long while ago, but what other idiotic moves are waiting in the black box? this sense of infallability won't reflect itself in the quality of the underlying assets? come on...
c) go with what got you here: lack of transparency. the captain is obviously going down with the ship - and with the way their PR machine (hi Russell) is handling the spin, and it is taking PUBLIC money, you guys better watch your backside before the cuffs go on.

2008 Nov 19 08:39 PM

[mgcolin:]

Sorry Mr. Wilkerson and no offense - you are obviously a smart guy, a true professional and very loyal to your employer GE. But the fact you are now posting here (presumably with the support of GE), is a negative signal in my opinion - you doth protest too much, methinks.

2008 Nov 21 08:37 PM

[Bill A:]

The freaks at GM Capital just got a bailout with my tax dollars and they wear my phone out all day when my payment to them is 2 days late. Screw GE! Hope they all rot in hell at that place.

Feb 10 07:47 PM

[Capt. Dave ...:]

I retired in 1995 after 32 years with first GE and later GE Capital. We were driven hard by Mr. Welch and I know that, at that time he set a responsible and high set of standards. We all had to sign annually a document ( 20.4 & 20.5 I think) which acknowledged we knew we would be fired for any "shady actions". Jack did a lot of things very well and I wish he was still there. I think however his short list for a successor was pretty weak. Immelt is doing a horrible job and another runner-up ,Bob Nardelli first wrecked Home Depot and is now poised to wreck Chrysler. The third person on the list was McNerney who should have taken the reins. By biggest fear now is the security of my pension. I'm frankly afraid the new regime will try to redistibute it! I'm too old (74) to be a greeter in Walmart!

Apr 05 12:57 PM

[KevyIrish:]

Mr. Wilkerson:

Did you read your recent 10q from 3/30/09? It reads like a "fictional" horror novel. More on that below, the real issue is the massive conflict of interest that now exists. GE is heavily indebted to the federal government and owns and operates a news agency that reports on this federal government. There can be no objectivity now. I think that the news emanating out of NBC at this point would become so distorted as to be comparable to a state owned propaganda machine reminiscent of North Korea, and should be ignored.

Read GE's latest 10q filing of 3/30/09. You are now tapping BOTH this $120 Billion FDIC line on top of the $80 Billion Federal Reserve commercial paper line. Your current ratio is .33 meaning you have 3 times as much current liability as compared to current assets. Sure, you could fund current obligations with long term debt or equity, but we both know the stupidity of that type of financing. Without this bailout your company would be insolvent (and unable to pay Olberman). I recognize it's not free, your APR is 0.75%, but without it you'd be in the 7% range

The quality of the assets is questionable as GE marks them at their discretion and don't include the lower marks in their income statement, as they are "unrealized." The income is questionable as well, as most of the net income can be attributed to a recently discovered tax loophole from 2005-2007. The IRS is now auditing GE accordingly. They must be desperate to be forced to "create" income at the risk of being audited. You are also facing a multibillion dollar class action law suit from investors who claim that GE materially misrepresented their finances and the stability of their dividend right up to the day they slashed it (for the first time in your history, which is further proof of the deterioration of your balance sheet). So who are you trying to kid? Yourself, I presume.

Read the 10q, compare it to, say IBM. GE won't be around this time next year (at least not in its current form). You can take that to the bank.

But like I said, the real issue is this glaring conflict of interest regarding your news division. Care to comment on that?

Kevin



On Nov 14 03:01 PM Russell Wilkerson wrote:

> Russell Wilkerson from GE: Mr. Hill, you are missing some fundamental
> points about GE Capital. Throughout the credit crisis, GE Capital
> has continuously funded its lending operations primarily through
> long-term debt. Contrary to your posting, we have not funded most
> of our business with short-term commercial paper. Less than 15% of
> GE Capital’s total funding, or about $80 billion, will come from
> short-term commercial paper by the end of 2008. Additionally, our
> CP is more than backed up with $62 billion in bank lines, $15 billion
> in new equity, and cash on hand.
>
> In recent weeks, we have taken steps to remain competitive with other
> financial institutions. This week, we announced we were approved
> to participate in the FDIC government program that guarantees debt.
> This program is not free. It is not a bail out. Like other participants
> in the FDIC program, we pay a fee to participate. The FDIC will guarantee
> up to $139 billion in long-term and short-term debt issued by GE
> Capital through June 30, 2009, but that does not mean we intend to
> issue that amount. GE Capital is also participating in the government’s
> Commercial Paper Funding Facility, another positive move to protect
> our liquidity and that of our investors. While our balance sheet
> is strong, we would place ourselves at a competitive disadvantage
> were we not to avail ourselves of these facilities. We are committed
> to the Triple-A credit rating. This guarantee program will further
> strengthen our already strong balance sheet and support our rating.
>
>
> GE Capital provides critical financing for U.S. infrastructure projects,
> municipalities and industries including airlines, hospitals, utilities,
> and many middle market sectors. GE Capital has also been a leader
> in aiding U.S. companies in restructuring. More details about our
> financial services businesses, our assets, and loan-loss reserves
> are readily available in our quarterly SEC filings and on www.gereports.com.
>

May 05 04:48 PM