Buffett’s Bet on G.E.: Almost as Good as a Bailout (Tell me again, why we need a bailout?)

We don't need a bailout. There are twelve trillion dollars parked in investments abroad, just waiting to come home, as soon as rational adjustments in the tax code are made.

The only people who need bailouts are the criminal elements who got us into this mess. It is a political powergrab not an economic crisis.

It's sad seeing the destruction of 'The House that Jack Built'.

I worked for GE for fourteen years [1985-1999 for GEAE] and it was one of the most dynamic and challenging enviornments I've ever worked in.

At six percent plus matching in my 401k, it made me 7 figures [on paper].

Immelt is kinda' like David Souter was for Bush. Jack made one bad choice.

Thank you for your moronic comments!

We have an INTERNATIONAL CREDIT CRISIS and Banks will not loan to each other.

GE is *NOT* a Bank.

Go and Learn!

Ah, so Immelt has tougher times than Jack?

Tsk, tsk.

In the past when GE couldn’t make earnings they could always sell off assets to earn a few extra pennies per share - at quarters end.

* sigh *

Times have changed, but I for one, will re-invest the high dividend checks!

First of all, this is not a “bailout” of Wall Street or any particular institution in Wall Street or any “fat cats” on Wall Street.

If you saw consequences of a “no-bailout” Lehman falling into bankruptcy, or AIG sold just before it went bankrupt, you would see what will happen on a massive scale. Sure, Fed and Treasury can manage this financial disaster in slow-motion, piecemeal, catching and trying to resell institutions and assets one at a time to anyone who will have the money and/or guarantees against now-frozen by fear loans. They tried slow walking this with Countrywide (sale to BofA) and Bear Stearns (sale to JPM) earlier in the year, but the markets are deflating and getting more frozen. They need to show that there is a liquid asset behind the currently frozen asset. Otherwise there is no liquidity... anywhere in the world, everybody is holding toxic paper, owned en masse - you guessed it - directly or indirectly by shareholders on Main Street whose jobs are at stake as well.

Look at Europe and their proposed $500B “bailout” - really a injection of liquidity and confidence in financial markets which have been screwed royally by stupid political tricks (CRA, Fannie / Freddie, onerous Sarbanes-Oxley provisions etc.) and accounting rules (”fair value” / “mark-to-market”, double options accounting in the name of “transparency” etc.).

People who lose money now are those who are invested in mutual funds, 401(k), and pension funds and individual companies stocks, ie Main Street folks. Without an artificially established amount of $700B, to be large enough not to do this piecemeal and coming back to Congress every time money will be needed there will be no confidence or money in the market to do or buy anything (just like after 9/11).

Real Wall Street (investors), along with Bay Street (Toronto), The City (London), Warren Buffett and various PE funds and sovereign funds (Dubai / Abu Dhabi, Chinese et al) directly or through proxies are now and will be making out like bandits in the environment we have now. They are now buying formerly $100B+ worth of market cap properties for $1B+, like AIG, Lehman, WaMu, others, with Main Street shareholders left holding the bag. Buffett is now making investments on usurious terms (and expecting Fed backing anyway, “bailout” or none passing).

Lack of capital begets the loss of capital. Paulson plan, designed to unfreeze the capital flow (the mother’s milk of capitalist economy) not only will be in public view (transparent, by virtue of including Congress in it), it’s also the only one that ensures the taxpayers will get ownership of some of the assets they now have to fire-sale one or two at a time to real “Wall Streets” who will be very happy with their investment a couple of years from now.

How this plan of oversized credit line is considered a bailout of Wall Street at the expense of Main Street, is beyond me - it’s the other way around. Without it, rich (”Wall Street”) will get richer and poor and middle class (”Main Street”) will get poorer.

Wall Street Opinion Journal (free) had several articles on what’s really going on in financial markets. One is called “Bail Out Main Street”. I know, they were all for “shamnesty”, but this matter is different, this liquidity crisis after burst RE bubble is not made up, it’s real and has a simple while not painless solution. The question is only how much pain we want to endure (slowdown, light recession, deep recession), because we know who will benefit (Wall Street) and at whose expense (Main Street), if it’s not done.

The financial “populism” has never been one of the conservatives ideals or strong suits, and has never served them well in the elections. Choosing between populist Democrat and populist Republican, people will always chose populist Democrat. GOP tried some domestic populism in 2006 and they still can’t recover from it. I hope it’s not the result in 2008.

How this plan of oversized credit line is considered a bailout of Wall Street at the expense of Main Street, is beyond me - it’s the other way around. Without it, rich (”Wall Street”) will get richer and poor and middle class (”Main Street”) will get poorer.

Right now, there are lots of assets floating around whose book value and market price (if any) have no meaningful relationship to their real worth. Injecting capital into the markets may help keep asset prices from collapsing, but that's not a good thing. Markets that lack confidence won't regain it until asset prices reflect reality. People aren't going to like finding out what some of their assets are really worth, but spending 700 billion dollars of real money to preserve the illusion of trillions of dollars of imaginary money is insane.

spending 700 billion dollars of real money to preserve the illusion of trillions of dollars of imaginary money is insane.

That would be insane, but spending $700B on illusion is not in any way, shape or form the Paulson plan. Market is not functioning temporarily, and the suspension of "fair value" / "mark-to-market" accounting rule alone will not do the trick. The access to liquidity is needed to restore the confidence in financial markets because there is no confidence in government or political class.

The companies who will decide to cherry-pick their portfolio will have to go without backing, so feds can play hardball on market values of RE, they can wait for derivatives to mature or be paid off but commercial loans to stable or otherwise creditworthy customers will begin to be made, and cash will start flowing. Fewer failed institutions, fewer failed / bankrupt companies, fewer layoffs = more confidence, better economy.

It could work just like with FNM, FRE, AIG, i.e. loan for equity, with a valuation on a more normal (longer term, non-crisis, non-panic) basis instead of letting otherwise highly valued assets going for peanuts in a fire sale to "the rich greedy vultures" of Wall Street (or one of the other financial "Streets"). The sooner the avalanch of credit crunch is stopped, the less suffering and more equity to the Main Street.

Let's keep in mind that FNM and FRE (together more than a third of all the loans and probably most of low valuation and low quality mortgages) are already being taken care of at the price of $200B (for essentially all equity and assets), which is not a part of this deal. Fed and Treasury will have to do this, the only question is, how - orderly, with a plan and credit line and access to more equity, or deal with a fire when it comes and let "the rich" benefit from cherry-picking the assets.

Bill Seidman (whom I respect a lot) had a great article in WSJ op-ed on similarities and differences between Paulson plan and RTC. Some things were easier for RTC then than they are now for Fed - Paulson plan will make it easier to execute, without as much turmoil, uncertainty and possibly large eventual cost to taxpayers. If some of the stupid or inflexible rules and regulations and institutions (like Fannie and Freddie) will go by the wayside in the process, only so much the better.

I have been impressed by what Bernanke and Paulson have done so far (needless to say, I am not going to win popularity contests here), but they recognize that it's not a small problem that can be once again solved in haphazard manner, cleaning after politicians who have done their damage and are now in process of pointing fingers. They understand that they need the authority to do certain things and a Big plan and a Big credit line (size matters!) to do it, without taking the "risk of failure" from the market and individual players, but removing the systemic risk of failure for the entire economic and financial system. This is not "socialism" that I hear so much about these days.

GE is *NOT* a Bank.

That's a matter of opinion - GE Capital is one of the world's largest lenders, and a huge part of the company's revenue stream. And they aren't doing very well lately.

I have been impressed by what Bernanke and Paulson have done so far

It was their own misfeasance or malfeasance that allowed the situation to get so far out of hand. They had the tools necessary to nip the problem in the bud, but they declined to do so. What reason do you have to believe that B&P will use any new powers they get toward doing what they're supposed to be doing?

I don’t think it was their misfeasance or malfeasance that got us a final breakdown of CRA-Fannie-Freddie derivative meltdown, nor do I think they could have nipped the problem in the bud. Some of their actions might have slowed down or might have accelerated the system that was guaranteed, actually designed by the government, to break down and fall hard.

They don’t get too many new powers that they didn’t de facto have already, which showed during BSC, WaMu, AIG, FNM / FRE and other fiascos. What they really want to do is have Congress / government as a legitimate “partner” in what they are doing, not to be scapegoats and called on the carpet by malfeasant Congress-critters when they are in process of putting out the fires started, promoted and exacerbated by malfeasant Congress and former “regulators”.

As I said before, this is not a Wall Street bailout, doing nothing or putting out fires as they come, piecemeal, will only enrich “Wall Street” at the expense of “Main Street” and will still cost taxpayers a lot of money. This plan may actually turn out to cost little or far less over a period of time with far less disruption to real economy and foreign policy.

The “Let market work” sentiment while great in principle, is undermined by the fact that much of the current problem has been many years / decades in the making and had a direct and main participant in the form of government in all its shapes and forms (law makers, rule makers, regulators et al) which interfered in the proper functions of the market and now look for scapegoats in CEOs and “greedy speculators” which their own policies enabled and encouraged.

It’s not pretty but firefighters should not be blamed for the fires or inability to put them out without any damage to property on which gasoline was constantly poured.

The “Let market work” sentiment while great in principle, is undermined by the fact that much of the current problem has been many years / decades in the making and had a direct and main participant in the form of government in all its shapes and forms (law makers, rule makers, regulators et al) which interfered in the proper functions of the market and now look for scapegoats in CEOs and “greedy speculators” which their own policies enabled and encouraged.

The market needs to make an orderly but expeditious retreat to realistic valuations. Certain types of regulations would greatly facilitate this process. Unfortunately, Sec. Paulson will be given a huge amount of essentially unchecked power to spend huge sums of money manipulating the prices of various assets. Odds are 99:1 that most of the times he manipulates prices he will be trying to direct the market away from where it needs to be.

We are basically on the same page.

Unfortunately, Sec. Paulson will be given a huge amount of essentially unchecked power to spend huge sums of money

Not much more than previous Treasury Secs did, besides this time it will not be unchecked precisely because of Congressional "oversight", i.e. this time the money that will be spent will be known and watched by both left-wingers and right-wingers in the light of day, so there is [hopefully] less potential for malfeasance. I actually trust congressional "overseers" less, they were the principals behind this fiasco to begin with.

Re Paulson, "With great power comes great responsibility" / "From those to whom much is given, much is required", but the flip side is also true - those with great responsibility should have enough power and/or money to accomplish the task.

I am much more concerned with all the stupid "sweeteners" that made it into the Senate bill. I don't think that would be the case if House voted for their much cleaner bill first time.

GE Finance is heavily involved in LEASING stuff like airplanes and heavy equipment.

Now, Banks have had Leasing operations or funded leasing activities, but not really the same and GE is not chartered as a Bank.

Hmm, and at one time, GE got burned owning Kidder Peabody* (see footnote below;) , an investment bank, that was sold to Paine Webber, now part of USB Credit Suussse - First Boston, etc.

So I would say, that not only is GE not a Bank, they have walked away from morphing into the domain of Banks.

Footnote:

Kidder, Peabody & Co. was a U.S.-based securities firm, established in Massachusetts in 1865. Its operations included investment banking, brokerage, and trading. The Firm was sold to the General Electric Corporation in 1986 and subsequently sold to PaineWebber in 1994. Following its acquisition by PaineWebber, the Kidder, Peabody name was dropped, ending the firm’s 130 year presence on Wall Street. In November 2000, PaineWebber itself was merged with UBS AG.

Shortly after GE bought Kidder in 1986, a skein of insider trading scandals, which came to define the Street of the 1980s and were depicted in the James B. Stewart bestseller Den of Thieves, swept Wall Street. The firm was implicated when former Kidder executive Martin Siegel—who had since left for Michael Milken’s junk-bond investment firm, Drexel Burnham Lambert—admitted to selling inside information.

Also implicated by Martin Siegel was Richard Wigton, head of Arbitrage trading for Kidder Peabody. Richard was the only executive handcuffed in his office as part of the trading scandal, an act that was later depicted in the movie Wall Street. Later the US prosecutor, Rudy Guliani, admitted that Richard was innocent.

Kidder, Peabody was later involved in a trading scandal related to false profits booked over the course of 1990–1994. Joseph Jett, a trader on the strips and recons desk, had been systematically generating false trades to inflate the profits for his desk. Joe was Kidder’s Man of the year in 1993. Joe had lost 75 million dollars over the four years instead of the apparent profit of 275 million dollars over the same period.

In the rush of bad press coverage following the disclosure of the overstated profits, General Electric sold the assets of Kidder Peabody to PaineWebber for $670 Million in October 1994, closing the transaction in January 1995.

Correction:: I confused Credit Suisse, with USB AG

http://www.credit-suisse.com/us/en/

(Includes the American Firm - First Boston;)

http://www.ubs.com/

(USB bought Paine Webber - Paine, Webber, Jackson & Curtis - 1942)

First Boston Corporation was a New York-based investment bank, founded in 1932 and acquired by Credit Suisse in 1988, when it became ‘CS First Boston’. Globally referred to as Credit Suisse First Boston after 1996, the First Boston part of the name was phased out in 2006.