struggling to get short term financing at a price it wants to pay. So what
does GE do? The answer is twofold:
1) Borrow from the Commercial Paper Funding Facility
2) Pretend this is a good thing.
Consider this ridiculous headline: GE to Sell CP to
Fed to Help Unlock Credit Markets.
Electric Co., the biggest U.S. issuer of commercial paper, plans to use the
Federal Reserve’s new short-term funding facility, throwing its weight
behind the central bank’s efforts to unlock the credit markets.
“This is a way for us to demonstrate our support for what the Fed is
doing, which is providing all-around liquidity,” Wilkerson said.
Let's translate what GE said into English:
"We desperately need short term cash and cannot get it elsewhere."
GE Sees Shrinking Economy
GE's CEO Immelt Sees
Shrinking Economy for 2-3 Quarters.
The U.S. economy will have two or three quarters of “negative growth” once global
financial systems stabilize, General Electric Co. Chief Executive Officer
Jeffrey Immelt said.
Financial markets are experiencing the greatest disruption since the 1930s,
tightening credit for corporate and consumer borrowers. GE, the biggest U.S. issuer of commercial paper, said yesterday it plans to use a new short-term funding
facility from the Federal Reserve when the program starts next week, throwing
its weight behind Fed efforts to unfreeze the credit markets.
Companies should be planning under a scenario of “what happen if the
credit markets are half the size in 2009,” Immelt said. GE still runs
the company for its debt to be rated AAA, the highest available, Immelt said.
Financial companies will either become bank holding companies or have the AAA
rating, he said.
“We still believe if you have low cost of funds, good origination, good
risk management, there is a role” for a AAA- rated company, Immelt
said. “You’re either one or the other as time goes on.”
What if the credit
markets are half the size? What will that do to your financing costs if you
cannot get a handout from taxpayers?
GE Will Cut Costs, Jobs
GE is struggling as the following headline shows: GE Will Cut Costs,
Jobs, Immelt Says.
Electric Co. is cutting costs, preparing for a new wave of regulation from Washington and embracing manufacturing over financial services as ways out of the economic
crisis, its chief executive said Friday.
"Costs will be lower in 2009 than in 2008," Chairman and Chief
Executive Officer Jeffrey Immelt said in an interview. "That will be
true across the board." Employment will also be lower, he said,
declining to name numbers or percentages.
GE's NBC Universal business group recently announced cuts totaling $500
GE Monthly Chart
Technically GE is in a corrective pattern A-B-C (down-up-down) off the all
time high in 2000. How low share price goes is anyone's guess, but it is
already back to the same price it was at in 1997.
So much for dollar cost averaging even into the bluest of blue triple A rated
chips. For more on dollar cost averaging please see S&P 500 Crash
Count Compared To Nikkei Index.
GE Capital Financing Woes
I have a source at GE Capital who writes "Sales personnel are not
allowed to make any more loans this year, and are being told to try to get
their customers to pay off their loans. All prepayment penalties are waved
for closing loans and GE Capital is about to launch a new incentive scheme
for the salespeople that makes it worth their while to get their customers to
agree to participate."
A second source indicates the above statement is more than likely division by
division as opposed to an across the board measure. Divisions hit by that
ruling might be things like auto and boat leasing, dealer financing, etc.
In regards to the latter, think about the deteriorating asset quality of both
the loans and the assets GE would pick should GE's customers default.
YahooFinance shows that GE has $548 billion in debt.
The above chart shows that GE has $204 billion in short term financing needs
with $3.8 billion in cash and a rapidly rising debt to equity ratio of 4.866.
Other than the government (taxpayer), where is GE going to get $200 billion
to keep rolling over that short term financing? At what interest rate? I have
How many billions of dollars did GE waste buying shares back over the years
at $40 or greater? $35 or greater? $25 or greater? $20 or greater? Think of
where GE might be if it used the money to pay down debts rather than buy
shares at absurd prices.
I see that GE is paying a dividend of 6.6% while borrowing money from
taxpayers to fund operations. How long can that dividend last?
Here is one final thought. The government stepping in to provide cheap
financing to GE is not doing anyone any good. Paulson wants banks to lend,
and by doing so is artificially driving down short term rates. Why should GE
get short term financing from banks, when it can get a better deal (at
taxpayer expense) from the government?
Why should banks make loans when the government is taking away opportunities
in one of the few AAA rated opportunities around? This assumes of course you
think GE is really deserves to be AAA. Then again, that AAA rating is
something that needs to be determined by the market forces not government
sponsored rating agencies or the Federal government itself.
The entire gamut of Bernanke's lending schemes are failing, and will continue
to fail. GE helps
Mish's Global Economic
Thoughts on the great inflation/deflation/stagflation
debate as well as discussions on gold, silver, currencies, interest rates,
and policy decisions that affect the global markets.