GE not ready for a Fed jolt just yet
Everyone’s a critic. And when it comes to the extraordinary policy set by the Federal Reserve to beat back the financial crisis, expect the second-guessing to intensify as bubble concerns grow.
But before the evisceration begins, it’s only fair to note just how successful such policies have been.
There’s been lots of ink spilled on how the government’s policies saved the big banks from imploding, but less on how myriad supports propped up Corporate America after investor panic swiftly eliminated its life line to the short-term and long-term debt companies depend on to keep their operations running.
There are few companies that say Corporate America quite like General Electric. Not only does its broad reach in the U.S. economy make it a bellwether for investors, but its troubles accessing credit last year and the woes at its finance unit, GE Capital Corp, made it a prime example of companies side-swiped by the crisis.
GE’s earnings last week demonstrate what a little breathing room can do for a company that many feared wouldn’t survive intact just six months ago.
The Federal Reserve’s back-stop of the commercial paper market — the place where companies like GE find short-term financing to pay for such basic expenses as rent and payroll — stands as one of the most critical emergency measures the central bank put into place last year to keep good companies from suffering the same fate as the bad.
It ensured that companies could pay their bills while giving them sufficient time to find more reliable financing elsewhere.
GE has kept its commercial paper exposure to $50 billion, down 31 percent from the end of last year and half the amount it borrowed in the first quarter of 2008. Moreover, the company said it has sufficient cash and bank lines of credit to cover its short-term debt more than two times over.
And thanks in large part to the cheaper financing it received through another temporary government plan — GE raised $52.6 billion of debt through the Federal Deposit Insurance Corp’s debt guarantee program, according to Thomson Reuters — the company has pre-funded more than 90 percent of its estimated longer-term debt through 2010.
This is hardly saying that GE is out of the woods. GE Capital’s heavy investment in commercial real estate is still the big worry since it’s hard to say just how bad the downturn will be, or whether the unit has set aside enough funds to cover future losses.
It’s a long way from March, though, when traders in GE Capital credit default swaps started demanding up-front payment amid fears that GE, tired of weakness at the unit, would spin it off.
Its CDS are now around a more moderate 212 basis points, or $212,000 to insure $10 million of bonds, according to Markit, and GE further strengthened its ties to the finance unit by extending its commitment to five years from three.
Despite the euphoria in financial markets in recent weeks, there’s still a fair amount of uncertainty about whether the bottoming in the economy will lead to a rapid recovery that the markets are pricing in.
This, too, makes GE, unlike the banks, a good bellwether. The government set out to stop the credit crisis from ensnaring companies that otherwise could withstand a deep recession. No one wanted to see a company like GE send out a memo that it couldn’t keep the lights on.
The FDIC program is due to expire at the end of this month (though it may be extended for emergency cases) while the Fed’s commercial paper facility will become a footnote in the credit crisis annals early next year. Though the short-term lending backstop could have been ended earlier, the cession of these programs shows that the government wants to get out of the business of propping up the private sector indefinitely.
But neither does the Federal Reserve or Treasury want to push companies back to the brink before they have a chance to fully regroup. Andrew Bary in this week’s Barron’s called for the Fed to jack up interest rates to 2 percent to avoid inflating another financial bubble.
While the run-up in stocks, oil and gold, not to mention junk debt, looks like bubblettes in the making, it’s still too early to risk such a jolt. Policy makers need to keep a steady hand on the tiller until there’s more evidence that recovery is truly taking hold.