Defaulting banks - where will it stop?

[David Butler]

More on what the market thinks of GE's chances of bankruptcy from Ticker Forum's Karl Denninger:

More GE (IMPORTANT)

Off the wires, no link.

"DJ reports GE Capital credit default swaps worsen even as GE released a statement emphasizing its strong cash position. The CDS are most recently quoted at 17.5 points up front, from 16.5 points up front earlier today, according to Phoenix Partners Group. That means investors must pay $1.75 mln up front, plus a $500,000 annual fee, to protect $10 mln of GECC senior bonds against default for five years."

That means the first year cost is $1.75 + $500k, or $2.25 million.

That's 22.5% first year cost to insure $10 million against default!

This means that the market is saying that the odds of GE going bankrupt within the next twelve months is greater than one in five, and that assumes zero recovery.

If the bonds would recover more than 80% in the event of a default then it is implying more than a 100% risk of default, which is obviously impossible.

This is occurring despite GE's CFO appearing this morning on CNBC making the case quite clearly that there is no risk of default under any materially possible scenario. In other words, his assertion is that the odds of default are zero.

One of two things must be true:

1.
GE's CFO is lying and must be indicted for doing so.
2.
This so-called "market segment" (CDS) has become so ridiculously overlevered, unsupervised and able to cause failures that it is now within days or even hours of CAUSING GE to fail - not due to GE's own internal problems, but due to positive feedback that the CDS market is capable of and is generating on the initiative and as a consequence of the action of participants in that market.

Either way a major change needs to occur right here and now, lest we find ourselves with no pensions, no Social Security, no Medicare, no annuities and no government.

THIS CAN NO LONGER BE DELAYED OR TOYED AROUND WITH; WHEN "THE BEZZLE" REACHES THE POINT THAT IT STARTS DESTROYING THE NATIONAL CORPORATE INDUSTRIAL GIANTS THAT MAKE UP OUR ESSENTIAL INFRASTRUCTURE, MILITARY AND COMMERCIAL ENTERPRISES THROUGH NO FAULT OF THEIR OWN IT IS A NATIONAL SECURITY EMERGENCY AND MUST BE DEALT WITH IMMEDIATELY.

http://market-ticker.org/archives/853-Mo...RTANT.html

The piece lays out the situation clearly and starkly, and I agree with most of it.

However, I disagree with part of Karl Denninger's last paragraph if he is suggesting that GE bears no responsibility at all for its likely imminent fate..

Imo CEO Jack Welch deliberately used GE's AAA credit rating, based on its manufacturing and R&D prowess, to get into the dodgy loan market. GE became a loan shark.

In 2001, I was researching GE for a documentary profile of Jack Welch, and spent some time in the GE company town of Schenectady - once known as "The City that Lights and Hauls the World". By the time I drove down Main Street, parts of Schenectady came straight from a Coen Brothers movie, with tumbleweed blowing past empty and looted shop fronts...

Amongst the many people I spoke to was a former senior R&D officer in GE, whose father had also run a GE R&D department. Sitting on his porch on a warm summer night, this intelligent, moral, man cried as he told me of the destruction of GE's once world famous research department. And of the destruction, "outsourcing" and "subcontracting" of many of GE's manufacturing arms.

And all for what? So GE could use its AAA credit rating to make loans so dodgy that most companies would not dare go there.

But not GE under Jack Welch.

Wall Street loved Jack Welch.

Wall Street lionized Jack Welch.

For making them massive profits whilst planting the seeds that would destroy GE and the global economy as we know it.

:evil:

GE downgraded...Did you place that bet then Jan ?

General Electric debt rating cut

US conglomerate General Electric had its debt rating lowered by ratings agency Standard and Poor's.

Its rating has been cut from AAA, the highest rating, to AA+. The action may make it more expensive for GE to borrow in the future.

The downgrade is significant because GE is viewed as a barometer of the health of the US economy.

GE last month cuts its dividend, a move it said would save it $9bn a year as it sought to shore up its finances.

"While no one likes a downgrade, this review and rating reaffirm the relative strength of the company," said GE Chief Executive Jeff Immelt.

GE's finance unit GE Capital has been hit because it makes a wide variety of loans, including mortgages, that have since seen their value plummet.

The economic downturn has also hit its industrial unit, which makes aircraft engines, home appliances, light bulbs and wind turbines.

The ratings downgrade means that S&P now considers GE less likely to pay back its debts. However, the agency considers GE's outlook stable.

"We are prepared to fund the company as a double-A, but we will continue to run GE with the disciplines of a triple-A," Mr Immelt said.

The company said it did not expect any impact on the way it funds itself from the ratings downgrade.

http://news.bbc.co.uk/1/hi/business/7940191.stm