GE Capital datapoint of the day

By Felix Salmon
June 30, 2009

From Jeff Gerth and Brady Dennis:

GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company’s massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government’s actions have been “powerful and helpful” to the company, GE chief executive Jeffrey Immelt acknowledged in December…

The FDIC has been working to wean financial institutions off the program. The TLGP originally was slated to end in June, but at the Treasury’s request the FDIC agreed to extend it until Oct. 31. Some participants have stopped using the program, but GE Capital continues to do so for the overwhelming majority of its debt.

Much of the $340 billion in debt will come due in 2012, the year the FDIC guarantees expire. At that point, known in banking circles as the “cliff,” the agency will have to make good if companies such as GE are unable to honor their obligations. FDIC officials say they are comfortable that the agency has collected more than enough money to cover potential losses.

It’s abundantly clear that the FDIC won’t have collected nearly as much money operating the TLGP as it has offered to GE Capital in guarantees. It’s also abundantly clear that GE Capital is too big to fail and won’t be allowed to default — instead, the FDIC guarantees will just be rolled over somehow. What’s not clear at all is how on earth the US government intends to separate GE Capital from its parent, in line with the current administration’s promises that systemically-important financial institutions can’t be owned by non-financial companies.

GE ended up borrowing disproportionately from the TLGP because it had a disproportionately large amount of short-term liabilities which needed to be rolled over — in that sense it was even more of a bank than most banks, if your definition of a bank is any entity which borrows short and lends long. It clearly needs to be regulated as a standalone bank. But how we’re going to get there from here is far from obvious.

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