Friday, November 14, 2008

FDIC Insures GE Capital's Debt


A follow up to the auto sector and hedge funds write up:

General Electric said Wednesday that the federal government had agreed to insure as much as $139 billion in debt for its lending subsidiary, GE Capital. This is the second time in a month that G.E. has turned to a federal program aimed at helping companies during the global credit crisis.

Until September, GE relied on selling commercial paper to obtain more than 15% of the funding of the finance unit. But investors began shying away from commercial paper after Lehman Brothers Holdings Inc. filed for bankruptcy protection and several other big financial players struggled. GE has said it would reduce its reliance on commercial paper, but it wasn't clear how the company would replace that funding.

GE Capital is not a bank, but granting it access to a new program from the Federal Deposit Insurance Corporation may reassure investors and help the lender compete with banks that already have government-protected debt, a G.E. spokesman, Russell Wilkerson, told Bloomberg News.

“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Mr. Wilkerson said. Joining the program could make it easier for GE to issue new debt in coming months. In recent months, investors have worried about GE's liquidity, and the price it has to pay to borrow money.

The F.D.I.C. program covers about $139 billion of G.E.’s debt, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30. GE said Wednesday that under the program, the government will guarantee as much as $139 billion in long- and short-term debt through next June. But, Mr. Wilkerson added, "This does not mean that GE intends to issue this amount of debt."

With roughly $600 billion in assets, GE Capital is as big as some large banks. The finance unit last year supplied almost half of GE's profit. But GE Chairman Jeffrey Immelt this September said he would shrink the unit in response to the credit crisis. GE Capital issues loans for everything from aircraft engines to commercial real estate and restaurant equipment.

G.E.’s finance businesses are able to seek F.D.I.C. debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. Last month, G.E. started using a new Federal Reserve program aimed at reviving demand for the commercial paper for a wide variety of companies.

Looks like the Treasury and Fed are making all the right moves and pushing the right buttons so far.

p/s photo: Nancy Wu Ding Yan & Sharon Chan Mun Chi


3 comments:

Mr. Padedoh said...

The Fed making the right moves and pushing the right buttons???
I think this move by the Fed is crazy, FDIC does not have sufficient capital to withtstand a collapse by GE. They had already ploughed in to serve Indy Mac, and now they will carry GE on their books.

A lot of this is contingent on the assumption GE will not fail. What happens if GE does fail? What happens if they just run out of working capital and can't service their liabilities. Re-fi? What happens if that occus soon after the collapse of a state bank in the US, a building society in the UK, and a pension fund in Germany. Hey, I don't think theres gonna be all that much demand for US-Ts going forward, not to even mention GE CP or MTNs.

I'll paint a scenario. 2-YR Yield rising to 7% in mid 2009. The Fixed Charges will kill most corporates.At that rate, we will have a good chance to really see whether Uncle Sam can indeed act as the backstop of last resort.

access said...

GE’s finance businesses are able to seek FDIC debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify.

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Mr. Padedoh said...

Thats not my point - my point is that Uncle Sam has overextended its balance sheet. Right now its 3 trillion - go check it out on CNBC.

Everything is contigent on the concept of a 'risk free entity'. Let me pose this question - at what level of deficit does the market begin to see the US as what it is - overextended, overleveraged and just plain pathetic?

Look carefully at the markets, and check out generationaldynamics.com; every indicator is for a sudden sharp collapse in the banking system. The precursor is when international demand for US-T falls off the cliff!
FDIC's gonna rue this..mark my words, i've been more right than wrong.