(c) 2010 F. Bruce Abel
I know this is mental masturbation, but I love to go back over topics in this blog and to review what I said. I just clisked on "GE" and looked at all my blogs under this topic. I thought it was excellent. Of course, that's me talking my own book.
Showing posts with label GE. Show all posts
Showing posts with label GE. Show all posts
Tuesday, June 8, 2010
Tuesday, August 11, 2009
GE Misled Public -- Pays $50 Million Fine
(c) 2009 F. Bruce Abel
Topic: GE "Misled" public pays $50mil fine? Posted: Yesterday at 9:01pm
Did you catch the news story that General Electric agreed to pay a $50 million dollar fine for "misleading" the public? I missed it too since it generally wasn't covered in the main media outlets. According to the Director over the Division of Enforcement with the SEC, "GE bent the accounting rules beyond the breaking point."
This is what Enron was doing. Essentially GE gets a pass on this. Why hasn't anyone been arrested yet? If no arrests, how about their credentials questioned? Anyone associated with the oversight, accounting, or reporting of GE's financial statement should have their credentials reviewed. Anyone who failed to recognize and report this type of fraudulent activity is certainly undeserving of such an honorable certification.
Click on my label "GE." That will get you a collection of my comments on GE Capital's misdeeds going back a couple of years, mainly reprising public articles in the New York Times talking about the dangerous derivatives that have not yet been written down on GE's books.
I've been writing about my suspicions re GE Capital and derivatives -- when GE was selling for 55 per share too, let alone lately when their shares are in the tank -- for a long time, back to 1997 or before, when I took time off to go up to Connecticut to visit my friend, a trader, in Grenwich, and to attend the accounting board's rulemaking discussion on amending Rule 157 dealing with "mark-to-market."
1/2 the circular room (looking down at the board who sat in the "pit") was filled with GE Capital (now GE Money) guys.
Couple that with the fact that GE's 10k's were a black box on what the heck GE Capital was doing to make all that money. (Same with Enron).
It's now coming out what was obvious on another score -- that GE managed their earnings every quarter by outright juggling and falsification in GE Capital and other divisions very similar to Enron.
Topic: GE "Misled" public pays $50mil fine? Posted: Yesterday at 9:01pm
Did you catch the news story that General Electric agreed to pay a $50 million dollar fine for "misleading" the public? I missed it too since it generally wasn't covered in the main media outlets. According to the Director over the Division of Enforcement with the SEC, "GE bent the accounting rules beyond the breaking point."
This is what Enron was doing. Essentially GE gets a pass on this. Why hasn't anyone been arrested yet? If no arrests, how about their credentials questioned? Anyone associated with the oversight, accounting, or reporting of GE's financial statement should have their credentials reviewed. Anyone who failed to recognize and report this type of fraudulent activity is certainly undeserving of such an honorable certification.
Click on my label "GE." That will get you a collection of my comments on GE Capital's misdeeds going back a couple of years, mainly reprising public articles in the New York Times talking about the dangerous derivatives that have not yet been written down on GE's books.
I've been writing about my suspicions re GE Capital and derivatives -- when GE was selling for 55 per share too, let alone lately when their shares are in the tank -- for a long time, back to 1997 or before, when I took time off to go up to Connecticut to visit my friend, a trader, in Grenwich, and to attend the accounting board's rulemaking discussion on amending Rule 157 dealing with "mark-to-market."
1/2 the circular room (looking down at the board who sat in the "pit") was filled with GE Capital (now GE Money) guys.
Couple that with the fact that GE's 10k's were a black box on what the heck GE Capital was doing to make all that money. (Same with Enron).
It's now coming out what was obvious on another score -- that GE managed their earnings every quarter by outright juggling and falsification in GE Capital and other divisions very similar to Enron.
Friday, July 17, 2009
Monday, June 1, 2009
A Morgenson Article Yesterday to Study
For the tax geeks, but it's a big hole in our country's ability to collect taxes. GE's entire success in the 1990's is from this loophole as GE bought a brokerage -- I forget which one -- that had billions in losses GE could use to avoid paying taxes on GE's billions of profits. When "billions" meant something.
http://www.nytimes.com/2009/05/31/business/31gret.html
http://www.nytimes.com/2009/05/31/business/31gret.html
Saturday, May 16, 2009
Friday, April 17, 2009
Wednesday, March 25, 2009
GE Dividend History -- Quarter by Quarter
Dividends hit the account April 27, 2009; $.31 per share.
http://www.ge.com/investors/stock_info/dividend_history.html
http://www.ge.com/investors/stock_info/dividend_history.html
Saturday, March 7, 2009
Friday, February 27, 2009
Sunday, December 7, 2008
Thursday, November 20, 2008
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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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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Henry Blodget
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yahooBuzzArticleHeadline = "Could GE (GE) Go To Zero?";
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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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Friday, November 14, 2008
Wednesday, October 1, 2008
GE
GE Capital CDS spreads widen 64 bps to 626 bps-CMA
Wed Oct 1, 2008 8:56am EDT
Trading will never be the same.
NEW YORK, Oct 1 (Reuters) - Credit default swaps on General Electric Co's (GE.N: Quote, Profile, Research, Stock Buzz) finance arm widened on Wednesday after a Deutsche Bank analyst cut GE's earnings estimate to reflect deterioration at the finance business.
The cost of annually insuring $10 million of General Electric Capital's debt over a five-year period with credit default swaps rose to 626 basis points, $626,000 a year, up from 562 basis points late on Tuesday, according to data from CMA DataVision.
Deutsche Bank cut GE's 2008 earnings per share estimate by 9 percent to $2. For details see [ID:nWNAB4233]. (Reporting by Dena Aubin, Editing by Walker Simon) (dena.aubin@thomsonreuters.com; +1-646-223-6325 ; Reuters Messaging: dena.aubin.reuters.com@reuters.net))
Credit Default Swaps Explained
Posted Wed Sep 24, 02:14 pm ETPosted By: Dirk van Dijk, CFAAt this point, it makes sense to explain just what a credit default swap, or CDS, is. They were the key reason for the demise of AIG (AIG), and for the fear that if they were not bailed out that the whole ball of wax would come unglued. Essentially it is an insurance policy, but an unregulated one (the State of N.Y. just recently said that it would start to regulate part of the market -- can you say closing the barn door?). If you buy a bond from, say, General Motors (GM), you are lending them money for a set interest rate for a specified length of time. You face two sets of risks in doing so. The first is that they go bankrupt and don't pay you back. The second is that interest rates rise and the bond falls in value (think of bond prices and interest rates as being on opposite sides of a see-saw). With a CDS, you could go out and find someone who will insure against the default risk. For a given premium, the seller of the CDS will pay off on the GM bond if GM goes belly up. Now, if it was from a real insurance company, the insurance company would be regulated and would have to hold enough money in reserve to pay you off in case GM actually did go belly up. This is just like how a Life Insurance company has to have enough cash on had to pay off on your policy in case you die. However, since this is an unregulated market, someone can sell you a CDS and blow the money in Las Vegas. In that case, if GM did go belly up, you would just plain be out of luck.In the case of life insurance, there are strict limits on who can take out a policy on you. You can take out a policy on your own life, and on close family members. In some circumstances you can take out a policy on your business partner, but beyond that there are not many people you can take out a policy on. You have to have what is called an insurable interest; you can't just wander the halls of the hospital looking for people who are unlikely to make it and take out life insurance policies on them. This is not true for the CDS market. You are perfectly free to take out a "life insurance policy" on GM, GE (GE) or any other firm that issues a bond, and you do not have to be holding the bond. You can even take out a "life insurance policy" on the synthetic garbage the Wall Street has been pumping out.This ability to buy insurance on things that you have no insurable interest in transformed this market into a huge casino. It is totally unregulated, and even the new steps by the New York State Insurance Commissioner, Eric Dinnallo, only covers the least egregious part of the market, where people actually have an insurable interest (i.e. hold the underlying bond). Regulation of this market was specifically prohibited under the Commodity Futures Modernization Act of 2001. That provision was slipped into the bill in the dead of night by our old friend Senator Phil Gramm of Texas -- now Vice Chairman of UBS (UBS).People use this market to bet on the credit worthiness of companies, and often hedge funds will hold both long and short positions on the same underlying credit. For example (NOTE: figures are made up here, not a reflection of the actual creditworthiness of GE), the hedge fund might make a bet that it is worthwhile to get $200,000 up front and be on the hook for $10 million if GE defaults sometime in the next five years. Then after a few months, GE raises a bunch of capital which significantly strengthens its balance sheet and lowers the risk of default, so it can make a bet with someone else who would now be willing to take just $100,000 to bet that GE will not go belly up within then next five years. The hedge fund could have a perfectly matched book, so in theory they were totally indifferent if GE survives or not. However, suppose that the person who they made the bet with goes bankrupt themselves and can't pay up. That hedge fund might then have a hard time paying its counter party. This is where the fear of "cascading cross defaults" comes in.All this is to say that the CDS market has seen more growth than practically any market in the history of mankind. It is currently at over $62 TRILLION, up from under $1 Trillion a decade ago. It would not take a very big percentage of that market to fail to leave a very big mark on the world financial system. When the dust settles from all the current mess, bringing this market under control has to be high on the agenda. I would suggest that the contracts be standardized and that they be traded on an exchange, where the exchange itself acts as the counter-party for each trade (this is how the commodity exchanges work). It might also make sense to require that any party buying a CDS have an insurable interest in the underlying bond (i.e. that they are using it to hedge, not speculate). This however, is work for the next Congress and Administration. First we have to put out the fire with a well crafted and responsible bailout bill to prevent these cascading cross defaults from occurring. The original Paulson proposal was not well crafted, yet Congress doesn't appear likely to make significant improvements to the bill.Read the full analyst report on AIGRead the full analyst report on GMRead the full analyst report on UBS
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Wed Oct 1, 2008 8:56am EDT
Trading will never be the same.
NEW YORK, Oct 1 (Reuters) - Credit default swaps on General Electric Co's (GE.N: Quote, Profile, Research, Stock Buzz) finance arm widened on Wednesday after a Deutsche Bank analyst cut GE's earnings estimate to reflect deterioration at the finance business.
The cost of annually insuring $10 million of General Electric Capital's debt over a five-year period with credit default swaps rose to 626 basis points, $626,000 a year, up from 562 basis points late on Tuesday, according to data from CMA DataVision.
Deutsche Bank cut GE's 2008 earnings per share estimate by 9 percent to $2. For details see [ID:nWNAB4233]. (Reporting by Dena Aubin, Editing by Walker Simon) (dena.aubin@thomsonreuters.com; +1-646-223-6325 ; Reuters Messaging: dena.aubin.reuters.com@reuters.net))
Credit Default Swaps Explained
Posted Wed Sep 24, 02:14 pm ETPosted By: Dirk van Dijk, CFAAt this point, it makes sense to explain just what a credit default swap, or CDS, is. They were the key reason for the demise of AIG (AIG), and for the fear that if they were not bailed out that the whole ball of wax would come unglued. Essentially it is an insurance policy, but an unregulated one (the State of N.Y. just recently said that it would start to regulate part of the market -- can you say closing the barn door?). If you buy a bond from, say, General Motors (GM), you are lending them money for a set interest rate for a specified length of time. You face two sets of risks in doing so. The first is that they go bankrupt and don't pay you back. The second is that interest rates rise and the bond falls in value (think of bond prices and interest rates as being on opposite sides of a see-saw). With a CDS, you could go out and find someone who will insure against the default risk. For a given premium, the seller of the CDS will pay off on the GM bond if GM goes belly up. Now, if it was from a real insurance company, the insurance company would be regulated and would have to hold enough money in reserve to pay you off in case GM actually did go belly up. This is just like how a Life Insurance company has to have enough cash on had to pay off on your policy in case you die. However, since this is an unregulated market, someone can sell you a CDS and blow the money in Las Vegas. In that case, if GM did go belly up, you would just plain be out of luck.In the case of life insurance, there are strict limits on who can take out a policy on you. You can take out a policy on your own life, and on close family members. In some circumstances you can take out a policy on your business partner, but beyond that there are not many people you can take out a policy on. You have to have what is called an insurable interest; you can't just wander the halls of the hospital looking for people who are unlikely to make it and take out life insurance policies on them. This is not true for the CDS market. You are perfectly free to take out a "life insurance policy" on GM, GE (GE) or any other firm that issues a bond, and you do not have to be holding the bond. You can even take out a "life insurance policy" on the synthetic garbage the Wall Street has been pumping out.This ability to buy insurance on things that you have no insurable interest in transformed this market into a huge casino. It is totally unregulated, and even the new steps by the New York State Insurance Commissioner, Eric Dinnallo, only covers the least egregious part of the market, where people actually have an insurable interest (i.e. hold the underlying bond). Regulation of this market was specifically prohibited under the Commodity Futures Modernization Act of 2001. That provision was slipped into the bill in the dead of night by our old friend Senator Phil Gramm of Texas -- now Vice Chairman of UBS (UBS).People use this market to bet on the credit worthiness of companies, and often hedge funds will hold both long and short positions on the same underlying credit. For example (NOTE: figures are made up here, not a reflection of the actual creditworthiness of GE), the hedge fund might make a bet that it is worthwhile to get $200,000 up front and be on the hook for $10 million if GE defaults sometime in the next five years. Then after a few months, GE raises a bunch of capital which significantly strengthens its balance sheet and lowers the risk of default, so it can make a bet with someone else who would now be willing to take just $100,000 to bet that GE will not go belly up within then next five years. The hedge fund could have a perfectly matched book, so in theory they were totally indifferent if GE survives or not. However, suppose that the person who they made the bet with goes bankrupt themselves and can't pay up. That hedge fund might then have a hard time paying its counter party. This is where the fear of "cascading cross defaults" comes in.All this is to say that the CDS market has seen more growth than practically any market in the history of mankind. It is currently at over $62 TRILLION, up from under $1 Trillion a decade ago. It would not take a very big percentage of that market to fail to leave a very big mark on the world financial system. When the dust settles from all the current mess, bringing this market under control has to be high on the agenda. I would suggest that the contracts be standardized and that they be traded on an exchange, where the exchange itself acts as the counter-party for each trade (this is how the commodity exchanges work). It might also make sense to require that any party buying a CDS have an insurable interest in the underlying bond (i.e. that they are using it to hedge, not speculate). This however, is work for the next Congress and Administration. First we have to put out the fire with a well crafted and responsible bailout bill to prevent these cascading cross defaults from occurring. The original Paulson proposal was not well crafted, yet Congress doesn't appear likely to make significant improvements to the bill.Read the full analyst report on AIGRead the full analyst report on GMRead the full analyst report on UBS
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Saturday, May 24, 2008
GE -- If I'm Not Mistaken...
GE's at a new low for the year.
One "dirty little secret" of investment managers used to be, simply, overweight your portfolio with GE.
One "dirty little secret" of investment managers used to be, simply, overweight your portfolio with GE.
OK, I just checked:
Thursday, May 15, 2008
On the GE Proposed Sale of GE Appliances
6.
May 14th,20087:06 pm
Warren Buffett would call this “gin rummy” style management–you just throw out your businesses that aren’t performing well at the time (opposite of Berkshire culture). Who knows, maybe Immelt needs to raise cash because of something we don’t know about, in order to retain GE’s AAA rating. I think Buffett makes nice to Immelt because he knows Immelt periodically gets urges to sell very good, stable businesses (e.g. medical protective)
— Posted by david brokl
May 14th,20087:06 pm
Warren Buffett would call this “gin rummy” style management–you just throw out your businesses that aren’t performing well at the time (opposite of Berkshire culture). Who knows, maybe Immelt needs to raise cash because of something we don’t know about, in order to retain GE’s AAA rating. I think Buffett makes nice to Immelt because he knows Immelt periodically gets urges to sell very good, stable businesses (e.g. medical protective)
— Posted by david brokl
Friday, April 18, 2008
Tuesday, April 15, 2008
Steve Leasman is Moving Up
His comments on GE yesterday were "spot on." I forget what they were, but they were insightful and, considering his job, courageous. Probably something along the line that GE's SEC filings didn't disclose much.
No "fresh" Cramer yesterday, either Stop Trading or Mad Money.
No "fresh" Cramer yesterday, either Stop Trading or Mad Money.
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