GE Analysis by Blodget, Yes That Blodget

Could GE (GE) Go To Zero? (GE)
Henry Blodget Nov 19, 08 9:55 AM
GE's stock (GE) continues to dive, recently hitting $16 (mid-1990s levels). In this economy, anything is possible. So could it go to zero?
If GE were still primarily an industrial company, this possibility would be so remote as to be barely worth considering (assuming GE's current cash flows and cash cushion). Now that GE has such a huge finance division, the odds are higher, but still remote.
As Warren Buffett pithily explained, anything multiplied by zero is zero, so if GE Finance suddenly has a run on the bank, the rest of the company could go down with it. That said, GE Finance is insulated from the credit crisis by carrying far less leverage (debt) than its Wall Street competitors and also by not marking its entire book of assets to market. If it had to do the latter, GE Finance's writedowns thus far would likely have been far greater than they have been. By holding loans to maturity instead of in a trading book, however, GE Finance can wait to take losses until loans actually stop performing. This eases the pressure on near-term funding requirements and reduces the likelihood of a run on the bank.
GE is also rushing to diversify its sources of short-term financing by building a consumer bank, which has gathered $43 billion in deposits thus far (up from $20 billion last year). (See graphic at left). These deposits can be used to reduce GE's dependence on commercial paper, which has previously funded much of GE Finance's short-term cash needs. Lastly, the government is now buying GE's commercial paper, which eliminates the need to worry about private investors suddenly getting scared and cutting off the company's oxygen supply.
For GE Finance to go to zero, the company's short-term financing would have to dry up suddenly, the way Lehman Brothers', Bear Stearns, and AIG's did. Now that the government is buying GE paper, this seems highly unlikely. Also, because the company isn't marking its whole book to market, it's unlikely that it will have to take devastating losses each quarter that would suddenly make its leverage ratio fly through the roof (and blow its credit rating), as happened at its erstwhile Wall Street competitors.
More likely, GE Finance will just continue to have crappy profits until the credit crisis ends. This could still hammer the stock, as GE Finance's profits still account for more than a third of GE's profits. In a really bad scenario, if GE's $600 billion of loans started to default en masse, this might force GE to raise more equity capital or sell off other divisions at fire sale prices just to cover the Finance losses. But even this still wouldn't be likely kill the whole company.
So we've got that going for us.
More from GE's Q3 investor presentation below:

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23 Comments
fusion said:
Nov. 19, 10:12 AM
Isn't finance a subsidiary, so that if its value went below zero, GE could just abandon it? Stockholders are not generally liable for the obligations of the companies in which they own shares. Or has GE guaranteed Finance or otherwise become responsible for its obligations?
Henry Blodget said:
Nov. 19, 10:18 AM
They can't just throw it off the truck. GE Finance has lent $600 billion against about $200 billion of borrowed cash. That's $400 billion it would have to come up with if all the loans defaulted and the creditors suddenly demanded their money back. GE could sell the division (or, if things got really bad, pay someone to take it), and as long as the other divisions were worth more than it lost on Finance, the rest of the company would still have value. But they can't just say, "Um, we've decided we don't want this $600 billion of loans anymore."
princetontiger said:
Nov. 19, 10:26 AM
Henry, this is a pretty good analysis...
fusion said:
Nov. 19, 10:32 AM
>>But they can't just say, "Um, we've decided we don't want this $600 billion of loans anymore." >> Which "they" are you talking about? GE or GE Finance? GE Finance can't decide to ignore its obligations. The question is whether GE is on the hook for those obligations. You say GE Finance borrowed 200 and lent 600. Where did Finance get the other 400? If it was equity from GE, then GE may lose the money, but Finance won't have to come up with the money if the loans default. If it was third party debt, Finance will have to repay (but not GE unless it guaranteed the debt).
Henry Blodget said:
Nov. 19, 10:37 AM
Right. GE can always cover the losses, but even GE doesn't have enough cash flow to cover the short-term financing requirements indefinitely. So if GE Finance's financing disappeared, GE would likely have to sell off other divisions (or equity) to raise enough money to plug the hole. All of this is extremely unlikely given the government's buying GE paper. And if we take GE at its word, the loan loss exposure shouldn't get beyond single-digit percentages of the asset portfolio (fingers crossed).
blsh (URL) said:
Nov. 19, 10:42 AM
Henry Thank you for providing a very realistic portrayal of GE's current condition and future outlook. Many bloggers seem to enjoy posting ridiculous armegeddon type rumors about GE with no substantial facts or financials to back up their thoughts. Unfortunately, many people read these rumors and this just causes more panic and drives the stock price down.
fusion said:
Nov. 19, 11:07 AM
Why would GE have to plug the hole? Is it legally obligated to do so? A primary idea of corporate form is that shareholders are not responsible for the debts of the company. I share the others' appreciation of your work.
Jim said:
Nov. 19, 11:08 AM
Isn't it true that even though GE does not guarantee the debt of GE Capital, it does guarantee that GE Capital will maintain certain liquidity and coverage ratios? Isn't this an indirect guarantee of GE Capital's debt and makes it extremely unlikely that GE Capital would default or that GE would abandon GE Capital?
Henry Blodget said:
Nov. 19, 11:32 AM
Shareholders aren't personally responsible for corporate debts, but if any debt remains after company's assets are liquidated, stock is worth zero.
FNP said:
Nov. 19, 11:40 AM
What is the corporate structure? Obviously, if GE Finance is unable to repay its obligation the stock in the subsidiary is worth zero. But are the debts recourse back to the parent company? My guess is they are, at least to some extent, because the AAA rating of GE Finance couldn't be justified without the backing of the parent.
Dr Younis said:
Nov. 19, 11:53 AM
Never treat the unlikely as impossible or the likely as certain.
Alex Schleber (URL) said:
Nov. 19, 12:06 PM
So for the presumably worst recession since the G.D., they are assuming credit losses below those of the mildish 1991-92 recession? And if you read that last slide more closely, it is saying something like: 59% international credit, of that 79% consumer = 47% consumer international total, of that (or the whole thing actually, not clear) 58% consumer secured, which sounds like Home Equity Loans to me, no? And we all know how those have worked out/are working out... Am I reading too much into this? It seems to me like their exposure is pretty massive, even though, as Henry points out, they may not have to do any large-scale write-downs for a while. But that 2% default number looks dangerously blue-eyed...
Jake said:
Nov. 19, 12:38 PM
Henry, I'm thinking fusion here thinks that GE Finance isn't really GE, that GE merely owns shares in GE Finance. Look GE Finance IS GE. Its a division of GE. Any money owed by Finance is owed by GE.
a nonie mouse said:
Nov. 19, 12:43 PM
another lame analysis and post with a question mark in the title. something like" "Did Henry Blodget Engage in A Sexual Intercourse with a Chicken Last Night?"
Henry Blodget said:
Nov. 19, 12:50 PM
It was faaaaaaaaaaaaaaaaabulous.
Neophyte said:
Nov. 19, 1:01 PM
How safe is the dividend?
EconAnalyst said:
Nov. 19, 1:44 PM
How safe is the dividend seems to be a fair question at this point. I think you could see the dividend get dropped for a short period of time to shore up the balance sheet. GE is in everyones 401(K). Any move that the company would take to prevent going to zero would be welcome to the large institution shareholders that control most of the stock. Most GE employees also have a large chuck on their own assets in the common stock of the firm. When I worked for GE, Sherin kept beating the drum of AAA credit rating, 10% organic growth and constant dividend. That was when the stock was stuck in the $32 - $35 range. Jake is correct. GE Money is part of GE, there is no separation that would allow GE to drop GE Money. I think you could see the stock drop below $10 / share, which would be a ~4.75 PE ratio. Phillips is already below that level. Final note, I love the GE 'Inspira' font. Cost the company millions of dollars and it looks like garbage if you reduce the font size below 14.
Delma said:
Nov. 19, 1:52 PM
If Henry said unlikely, Again I said, "Never treat the unlikely as impossible or the likely as certain."
Jake said:
Nov. 19, 2:04 PM
@Econ Analyst: I too worked for GE... one of the underperforming units. At that time almost every other division was regarded as a stepchild compared to GE Capital. I bet the "stepchildren" are secretly snickering now if not for the fact that their retirement funds are mostly tied to GE stock.
fatcat said:
Nov. 19, 2:43 PM
Henry,great article...BTW,did you read the James Quinn article on GE...highly recommended..Seeking Alpha
EconAnalyst said:
Nov. 19, 4:14 PM
If anyone is interested in GE based propaganda. http://www.gereports.com/
kguy said:
Nov. 19, 6:05 PM
whoaaaa henry!!!!! can we do a price point of where the stocks will be in 1 year. citi - goner bac - 5 bucks aapl - 40 goog - 120 ge - 0 rimm - 15 crm - 10 fslr - 40 spwr 10 hig, pru,met - goners? american govt - 0 fed - 0 consumers - 0
Walt in Raleigh said:
Nov. 20, 10:25 AM
I have quite a bit of $ in GE Interest Plus which is not gov.insured. How safe is it? Also depend on my GE Pension. Is it fully funded and would it continue in event GE failed?
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