Friday, March 6, 2009

Weasel words from Keith Sherin


Keith Sherin is the CFO of General Electric.  He was just interviewed on CNBC.  I have only seen highlights of the interview.  

Anyway here is just one of the money quotes – courtesy the CNBC website.

"We have an incredibly strong liquidity position," Sherin told CNBC.  "We've got $45 billion of cash; we have no triggers that we could see that would have any call on our cash in the short term."

Read it again.  It does not say that they do not have ratings triggers.  It does not say what rating the triggers cash in at and how much.  In fact it says nothing really.  Weasel words.

Ok – I got a single challenge.  General Electric’s old insurance company wrote AAA rated guaranteed investment contracts (or GICs).  GICs were standard for AAA rated insurance companies and were written at Ambac, MBIA and AIG.  In all those cases they caused trouble – potentially parent company liquidity trouble in the MBIA and AIG cases.

The GIC contracts almost always contain ratings triggers that require collateral to be posted on certain rating declines.  

The assets backing the GIC contracts and old annuity obligations are about 5 billion underwater (see note 9 in the GE annual report).  There is almost certainly a rating trigger.  That trigger (undisclosed and obscured by Sherin) might cause $5 billion in liquidity call.

Can we have a disclosure as to what the trigger is rather than a statement that the ratings triggers we have we can’t see causing us a problem?

Please.

In the interview Keith Sherin talked about how transparency would restore confidence in GE and then proceeded to hide behind weasel words.

This does not inspire confidence.

Are there more ratings triggers than the GIC one?  I have no idea as there is no disclosure.

Sherin's weasel words continue a fine tradition.

9 comments:

babar ganesh said...

is the $5B number (liquidity call) a guessed or known number?

John Hempton said...

A highly educated - and probably accurate - guess.

But it is a guess. The disclosure is non-existent.

And I have no idea if it is the only ratings trigger - because if it is then the whole issue is trivial.

And if it is not... then there are undisclosed problems.

The CFO did not help ups out.

J

Gino Caputo said...

Ok...but aside for the ratings trigger, isn't the more important issue solvency relative to the equity value being placed by the market. Equity holders can live with a ratings downgrade from a AAA undoubtful rating to something lower but still investment grade. From what I've seen, there is very little risk of insolvency (not even contemplated from my view) and if that is the case the market price is suggesting GE is no longer viewed as a going concern.

Swedish Lex said...

When looking at the situation from 30.000 feet, it seems that 1) slashing the dividend 2)point to surplus cash (as opposed to solvency) and 3) roll-out of CFO all over to communicate = growing desperation.

dWj said...

What I've read elsewhere is that GE is subject to $8 billion in calls if their rating drops below AA- (i.e. to A+ or below). I believe I saw this at fortune online, but I'm not able to find a source for this right now.

Andrew from Toronto said...

John,

This certainly seems to be following the established pattern of a government takeover.

Step 1 - "shocking" decline in stock price.

Step 2 - Management insistence that dividend is safe and the company is "strong".

Step 3 - Cut Dividend

Step 4 - CFO comes out to say that everything is fine, don't look here ... Hey isn't that a T-Rex standing over your shoulder...

Step 5 - government "bailout"

Step 6 - stock goes below $1

Is this not time to get really, really short?

Anonymous said...

Gino,

If a rating downgrade triggers very big collateral calls that can kill a company dead in no time. GE says they have $45b in cash, but if they have to post $50b in collateral after a downgrade default happens uless they get support. This brought AIG to it's current pitiful state and almost killed Ambac as well. If default is followed by creditors seizing assets or outright bankruptcy GE will be toast and shareholders can forget about getting anything, regardless what the book value is.

That's why it is absolutely essential that GE either be sure of it's AAA (fat chance) or assures everyone the collateral problem is managable.

andy said...

"Various debt instruments, guarantees and covenants would require posting additional capital or collateral in the event of a ratings downgrade, but none are triggered if our ratings are reduced to AA-/Aa3 or A-1+/P-1 or higher."

it's disclosed and in more detail than last year.
on top of not seeing them below aa-, they have 34b in insurance liabilities and 41b backing it up. why would you post collateral?

agree that sherin's demeanor on video is a good enough reason to sell. he's more convincing on the phone and whoever thought of putting him on tv needs a flogging. or to buy 50k more shares.

Anonymous said...

The more I read the quote the less I like it. He doesn't say that they the have no trigger that they can see, he says that they have no trigger that they "could" see ("could" being a bad combination of past tense and conditional). Sounds like once sometime back they looked, saw no triggers, and didn't dare look again. Then, the last part of the quote "in the short term" allows for the final 'out'; if a trigger occurs, say next week, he can just say that that was past the "short term" he was talking about. Sheesh.

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