Thursday, March 5, 2009

Good behaviour and General Electric


I tended to judge GE by their behaviour (cutting risk, getting rid of dangerous businesses) rather than their accounts (which are deeply rubbery).

Let me just fill you in on a single deal.  GE once had a very bad American Visa/Mastercard portfolio.  Deep subprime.  I was short GE in those days (above 50!)

They sold that portfolio to Metris Companies.  Metris was a desperately subprime credit card company that grew out of the mail order catalog sales business of Fingerhut.  (You are going to need a deep knowledge of people selling electronics, toys, kitchenware and comforters on monthly payment plans to have any knowledge of them.)  

Anyway, Metris had an insane average balance of over $4000.  ($4000 average balances at 30% yields where the average balance goes up sharply each year suggests that a lot of the loans will not be repaid.  Many balances had blown above $10 thousand and minimum or no payments were made.)

I shorted Metris and made a lot of money.  Unfortunately I kept a bit of the position on from 20 to 2 via 40 and then back up to 7.  It felt like burning in hell when the short doubled to 40.  And sheer (foolish) stubbornness meant that I did not cover the Metris at two or three dollars.

Metris should have crashed and burned.  It was first-rate cactus.  But it was bailed out by the master of the dumb subprime bailout.  Yes HSBC in the guise of its US Household Operation purchased GE’s old diabolical business at a premium to par.

So when you see HSBC raising money that is in part to cover losses that GE cleverly avoided.

Funny – you can’t tell in GE’s stock price.




John

PS.  For those that really want to know - the credit provided implicitly in Fingerhut's catalog business is now provided by CIT.

2 comments:

Anonymous said...

John,
it's the off-balance sheet derivatives that's worrying everyone.

GE may have to post additional collateral upon ratings cut.

Agree with you that the fundamentals don't warrant such a low stock price.

But it's a crisis of confidence at the moment.

andy said...

mystery solved.
just saw jeff matthews on techticker, comparing with a sanctimonious face GE's ROC with MMM and HON.
and he's using the 600b on the balance sheet to calculate it!!!!!!

next up WFC and GOOG. what's the difference anyway.

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