Free The Great Deformation by David Stockman Page B

AAA-rated American corporations, it was suddenly discovering that its hugely profitable finance company, General Electric Capital, was actually an unstable house of cards.
    GE Capital’s financial alchemy rested on a simple but turbocharged formula straight out of the Wall Street playbook. At the time of the crisis, GE Capital boasted $650 billion of financial investments from customized deals in real estate, equipment leasing, working capital finance, and private equity. While these highly proprietary investments yielded generous rates of return, they were also highly illiquid and prone to blow up at higher than normal loss rates, thus bearing an asset profile that called for generous amounts of equity capital funding. In fact, however, GE Capital’s massive balance sheet was leveraged nearly 10 to 1 and included upward of $100 billion of short-term commercial paper.
    Needless to say, this huge load of commercial paper carried midget interest rates (4.7 percent), which helped fuel impressive profit spreads on GE’s assets. But this ultra-cheap CP funding also bore short maturities, meaning that GE Capital had to rollover billions of commercial paper debts day in and day out.
    When commercial paper rates suddenly spiked during the Lehman crisis, GE was caught with its proverbial pants down. But rather than manning-up for the financial hit that his company deserved, Jeff Immelt jumped on the phone to Treasury Secretary Paulson and yelled “Fire!”
    Within days, the sell-off in the commercial paper was stopped cold by Washington’s intervention, sparing GE the inconvenience of having to pay market rates to fund its massive pool of assets. The Republican government essentially nationalized the entire commercial paper market.
    Even a cursory look at the data, however, shows that Immelt’s SOS call was a self-serving crock. His preposterous message had been that the commercial paper market was seizing up and that GE was on the edge of collapse—a risible proposition. Nevertheless, that assertion quickly became gospel among panic-stricken officialdom, and from there it rapidly spread to Wall Street and the financial press.
    Not surprisingly, even two years later when the dust had settled and facts were readily available to refute this horary untruth, Secretary Paulson insisted upon repeating the GE legend in his memoirs. Describing round the clock staff activities on Wednesday, September 17, he noted that “our most pressing issue” had been to “help the asset-backed commercial paper market before it pulled down companies like GE.”
    That was garbled nonsense. GE was not even a significant issuer of “asset-backed commercial paper” (ABCP). Those small amounts it did issue ($5 billion) were non-recourse and self-liquidating, meaning that GE Capital would have already passed ownership of the embedded assets to the ABCP conduit and its investors would have taken a hit, not GE.
    By the same token, it was a huge issuer of unsecured commercial paper (100 billion), but even that was not remotely capable of felling the mighty GE. The required rollover funding was less than $5 billion per week, which was petty cash for a $200 billion (sales) global corporation with an AAA credit rating.
    Although GE was not heading into a black hole, it was facing the need for a painful bout of liquidity generation which would have required either a fire sale of some of its sticky assets or a highly dilutive issuance of long-term equity or debt capital. Both courses were feasible, but each would have resulted in a sharp blow to earnings and top executive bonuses.
    Instead of allowing the free market to resolve the matter, however, the taxpayers were thrown into the breach in still another variation of stopping the alleged “run” on Wall Street’s cheap wholesale funding. Again, a necessary and healthy market correction was cancelled while the cronies of capitalism were kept in the