Tuesday, October 7, 2008

How Bad Is It?

Did we just bailout GE?
As of June 30, GE had about $100 billion in short-term debt, the commercial paper that is becoming more and more expensive to issue. Commercial paper has to be rolled over everything three months or so. This means that, unless GE massively reduced its short-term debt load in Q3, the company will need to keep borrowing about $100 billion every three months. A bummer, then, that the commercial paper market has seized up...So, good thing the Fed just announced another massive bailout plan for the commercial paper market. Many tens of billions of that bailout money will probably be headed to GE.
$25 billion went to the auto manufacturers, $85 billion to AIG, up to $29 billion to Bear / JP, $700 billion to yet to be determined, at least $900 billion in short term TAF liquidity, and now an unspecified amount to the corporate debt market. A few questions:

  • Is this another way for corporates to move toxic assets off-balance sheet as they tried to do with SIVs, or is this an effective strategy for preventing mass roll-offs in the essential short-term corporates market?
  • What will be the metrics for success?
  • How much of the $700 billion intended for MBS, CDOs and other structured debt will go toward this more vanilla form of financing?
  • Will the Fed rely upon the ratings agencies that were so very effective in evaluating the structured debt market to evaluate the corporates, or will they build an in house team to do so independently?
  • Many questions appear to be either unanswered or vague. What will be the next move of the feds?
UPDATE 10/11: Situation getting worse for GE:

The locomotives-to-movies conglomerate said GE Capital, which accounts for about half of its earnings, would suffer pre-tax losses of up to $6.6bn this year and up to $9bn in 2009, largely because of consumers’ ailing financial conditions.

In the US, credit loss provisions would rise to between $800m and $1bn from previous estimates of $600m-$800m, it said.

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