One of the cases for GE is that GE does not guarantee GE Capital Services (GECS). GE has less than 40 billion in debt outside the GECS structure – and if you buy GE and they let GECS go you get
- The industrials business which – as GE points out – makes about 17 billion in cash a year and requires only 3 of capital expenditures, and
- NBC Universal – which happens to own a few nifty (and well watched on Wall Street) cable channels.
This sounds like nice downside protection – except that the FDIC tied General Electric up. Not that I am used to saying anything nice about Sheila Bair – but the FDIC guaranteed debt that GE Capital issued has a guarantee from the parent company – at least as per this disclosure in the GE Capital Services form 10K.
At December 31, 2008, GE Capital had issued and outstanding, $21,823 million of senior, unsecured debt that was guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program. GE Capital and GE entered into an Eligible Entity Designation Agreement and GE Capital is subject to the terms of a Master Agreement, each entered into with the FDIC. The terms of these agreements include, among other things, a requirement that GE and GE Capital reimburse the FDIC for any amounts that the FDIC pays to holders of debt that is guaranteed by the FDIC.
Sheila Bair protected the taxpayer – but at the expense of crisis residual value in GE.
Of course this is only operational if GECS fails. And whilst I have worked quite hard on that - and my prima-facie view is that it does not - I will admit I just do not know.