GE Capital Default Risk Soars

As shown below, the cost of credit default swaps that insure against GE Capital default have spiked sharply over the last few days.  As of this morning, it cost about $680 per year to insure against the default of $10,000 in bonds for five years.  While this doesn't represent all of General Electric (GE), GE Capital's default would no doubt do a number on the overall company and the economy.  You think a GE collapse would get Congress to do something?

Comments

[swygert@law...:]

GE Capital's CDS spike is due to the abundance of fear in capital markets. Ask GE Cap how much AAA rated CP they have been selling each day lately. Me thinks they are doing nicely. Now may be the best time in a decade to buy GE Cap bonds and notes with attractive spreads over treasuries. Just compare the ten-year bonds. Yes, it looked similar for Countrywide, AGI, Leehman, Wachovia, but they all were sitting with then A rated debt, and their ability to raise capital for terms was just about nill. And, what a dynamic, diversified world player with resources and lines of credit which did not invest in class three assets over the top.

2008 Oct 01 11:52 AM

[JasonC:]

The banned stock short sellers have simply moved over to the debt markets and are shorting with reckless abandon there, anywhere they think they can create a self fufilling prophecy of lowered credit and higher rates paid leading to default.

The reason they are targeting GE is it shows up on their screens as having limited tangible book value for the size of its liabilities. GE has a book value capital of over $100 billion, but because it routinely buys back stock above book and pays cash in takeover deals, it also has a large intangibles line and a large goodwill line. Nobody focused on actual earning power gives either one a second thought. Everyone knows it is the strength and stability of GE's earning power that covers its bonds, not some giant stock of wadded paper sitting in a till, somewhere. But you can't tell that to this crowd of short sellers trying to force everything to be realized as cash today, and pretending that everything else is somehow unreal.

It is reckless, stupid, crazy, and hostile. But they have tens of billions in profits from dead banks awarded to them by clueless regulators trying to look populist by hanging bankers high, and they will bet them recklessly on a decline of anything that looks even remotely plausible. Then they just hope there is enough of a thundering herd behind them and they can gin up enough fear, to make their doom mongering prophecies come true.

The proper solution to all of it is obvious. The Fed should simply arb the epic spread between corporates and treasuries by buying the former and selling the latter. The banks ought to be doing that themselves. But if they won't, then the Fed should remember that it too is a bank, and wade in and take all this double digit paper, financed at zero.

2008 Oct 01 01:02 PM

[User 267065:]

Anyone who thinks GE is about to collapse has no clue of the assests GE represents.

Give us a break and do some homework before such a ridiculous claim.

2008 Oct 01 01:18 PM

[metal27:]

CNBC is reporting that Warren Buffet will buy several $B of a new GE perpetual preferred and GE will sell $12B of common.

2008 Oct 01 02:00 PM

[metal27:]

Buffet will buy$3B of preferred with a 10% return, get some warrants. Pfd is redeemable after 3 years, Buffet issued strong statement on strength of GE, is being interviewed on CNBC this minute.

Buffet says deal similar to GS deal, GE approached him.

2008 Oct 01 02:04 PM

[metal27:]

Buffet just said "if we don't (get Congressional action on the bailout plan), then I'll have done some dumb things."

2008 Oct 01 02:06 PM

[User 273255:]

I would imagine it's a bit premature to be surmising about a GE default. Is that your objective, spread more fear?
The last I checked GE is still AAA - if that means anything anymore.

2008 Oct 01 02:35 PM

[swellman:]

What the man is saying is that credit risk for GE is going up and fast, this doesn't mean they are going to collapse it just means the probability of this happening is running a lot lot higher right now. GE approached Buffet for the loan because they understand the risk they face, they would have never went into this deal if they weren't forced too. These aren't regular times some very big names are going down, it won't be pretty.

2008 Oct 02 09:45 PM