Mr. B

What Does Warren Buffett See in General Electric?

As jimmysmith notes, GE is three businesses: Industrials, NBC and Financial. To understand GE, one must analyze the different components.

The author is short GE. His case is GE operates in many emerging countries and sells to or finances non-investment grade companies. Therefore, GE should not carry an investment grade rating.

This makes no sense. It does not take into account, among other things, which business unit is involved, what product is sold and for what purpose, and the price and terms of the contract. Using this logic, every bank in the US, including JPM, BAC, C and others, should carry non-investment grade ratings.

The financial business unit has many of the risks of a bank. It borrows short and lends long. Liquidity is always a risk in current conditions. Leveraged loan exposure is likely large. Credit quality will decline as recessionary conditions take hold.

None of this means that GE is not sufficiently capitalized to pursue business opportunities nor absorb short-term credit losses in its financial portfolio. As a non-bank, GE can also do things that regulated banks cannot do which may make recoveries better in the long-run.

Buffet got a sweet deal that protects a good portion of his downside. While there may not be an immediate, short-term catalyst to drive the share price higher, GE has tremendous franchise value in all of its businesses.

Maybe the author should cover his short position while he can?

Breaking News: Wells Fargo Buys Wachovia

This is far from over.

Wachovia would have been in receivership this Monday if Citi and the FDIC did not step in. Wells walked. There would have been no real value today without Citi.

The Citi deal also protects taxpayers by issuing the FDIC $12 billion in preferred stock at 6% and warrants.

Wells will find its credit rating lowered. Wells is exposed to California real estate in a big way, especially with second mortgages. Wachovia doubles down on that bet. What happens if this deal is allowed to stand and then Wells needs to be bailed out at sometime in the future?

If the Wells deal stands, it will have a chlling effect on the ability of the FDIC to arrange other bank deals that help protect depositors and minimize the risk to taxpayers.

This deal should belong to Citi. Even the FDIC thinks so. We will see.