If GE Capital were a bank, it would almost certainly be insolvent (GE).
The company has $661 billion of assets and only $53 billion of equity. If its assets were marked-to-market, like those of banks, it is hard to imagine that the losses wouldn’t wipe out GE Capital’s equity. All it would take would be an 8% writedown–in a global debt collapse in which some assets are now worth pennies on the dollar.
So what happens now?
A few possibilities:
- GE muddles through. It shrinks its asset base gradually, uses cash flow from its industrial and finance businesses to cover write-downs and losses, and eventually emerges from the crisis a shadow of its former self. Of course, while it’s doing this, it won’t be snapping up cheap businesses, building its industrial operations, and pumping hundreds of billions of dollars of new credit into the economy the way a robust GE would. At least it will control its destiny, though, and not become a national embarrassment like Citi and Bank of America.
- GE raises tens of billions of new equity from the private market. Possible, but unlikely. And getting tougher and more expensive all the time. Having vaporized their capital by falling for the “just trust us” assurances of the collapsing banks, global investors are understandably sceptical of any company that claims its capital position is strong.
- Taxpayers bail GE out. Tim Geithner and Jeff Immelt meet in some secret back room and hash out a plan whereby the taxpayer backstops GE Capital’s losses and the western world is saved. Something tells us that this one won’t go over too well. The public has already had it with bailouts and Geithner, and the idea of bailing out a company that still throws of tens of billions of dollars of cash a year from an industrial business might be the last straw.
Which one will we choose? Probably A or C. But we’ll cross that bridge when we come to it. In the meantime, back to Platitudes, Assurances, Denial.
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