Jeff Immelt’s GE: The Too Biggest To Fail

In my first post on how stupid it was for Obama to pick Jeff Immelt for his election season commission to appear focused on jobs, I looked mostly at how much GE has been outsourcing manufacturing and technology. Though I mentioned GE’s status as another TBTF finance company, I didn’t explain that in depth.

Mike Konczal has a post in which he corrects Joe Klein’s misperception that GE is not another big finance company, and in the process shows how GE was one of the biggest beneficiaries of the government’s bailout of shadow banking in 2008-09.

In it, he shows how GE received the second biggest FDIC debt guarantees of any of the big finance firms, after only Citi. He borrows the graphic at the left from a Raj Date paper that also explains how GE leveraged (heh!) its teeny FDIC insured deposits to get a big debt guarantee.

Only a small fraction of GE Capital’s funding (some $24 billion in the middle of 2008) came through FDIC-insured deposits. Despite that, the structure of the FDIC’s Debt Guaranty Program enabled GE Capital to issue well more than that (more than $50 billion) in unsecured debt that was, in effect, taxpayer-guaranteed. In essence, the program was structured in a way that almost uniquely favored a shadow bank like GE — one with a relatively small depository, but with immense unsecured debt that had been issued by the depository’s affiliates.

Konczal then goes on to cite another paper explaining why this happened: GE used the credit rating it won in its manufacturing business to make a lot of big finance games possible.

1 run the industrial business for earnings;

2 add industrial services to cover hollowing out of the industrial base;

3 buy and sell companies through acquisition and divestment to achieve returns and growth objectives;

4 rely on large-scale acquisition to prevent like-for-like comparisons and to increase opacity and the power of narrative;

5 grow the financial-services business up to the limit of the company’s credit rating;

6 accept the balance-sheet costs in terms of return on capital but focus on managing return on equity and cost of capital;

7 add financial engineering to smooth earnings and manage growth….

[snip]

If the expansion of GE Capital rested on judgement and controls, it also reflected the structural advantage of the triple-A credit rating, which effectively made the financial business (as user of the credit rating) dependent on the industrial business (as credit-rating generator), and this in turn set limits on how much GE could expand without risking reclassification by credit-rating agencies. GE Industrial may be a low-growth business but it has high margins, is consistently profitable over the cycle and has funded almost all of the dividends that GE Consolidated has paid out, as well as providing the funds for acquisitions and repayment of debt. This solid industrial base is the basis for GE’s triple- A credit rating, which allows GE Capital to borrow cheaply the large sums of money that it lends on to consumers and commercial customers… [my emphasis]

Konczal summarizes the business model that Obama tapped, through Immelt, to build American jobs and competitiveness this way:

GE has been at the forefront of blurring a “financial services”-centric model of business onto the remains of a hollowed out manufacturing base, one kept in a minimal state just strong enough to qualify for high credit scoring.

In other words, Immelt and GE aren’t about building the jobs American needs (for graphic representation of that, see this post). Rather, they’re about transforming the fruits of American manufacturing into yet more destabilizing casino games.

And that’s what Obama picked today to lead his election-season effort to appear serious about job creation.

Sure, maybe it’ll fool the Joke Lines of the world into believing outsourcing to China is a solution to America’s job crisis. But those of us in flyover country seeing that jobs crisis up close are smarter than all that.

Marcy has been blogging full time since 2007. She’s known for her live-blogging of the Scooter Libby trial, her discovery of the number of times Khalid Sheikh Mohammed was waterboarded, and generally for her weedy analysis of document dumps.

Marcy Wheeler is an independent journalist writing about national security and civil liberties. She writes as emptywheel at her eponymous blog, publishes at outlets including the Guardian, Salon, and the Progressive, and appears frequently on television and radio. She is the author of Anatomy of Deceit, a primer on the CIA leak investigation, and liveblogged the Scooter Libby trial.

Marcy has a PhD from the University of Michigan, where she researched the “feuilleton,” a short conversational newspaper form that has proven important in times of heightened censorship. Before and after her time in academics, Marcy provided documentation consulting for corporations in the auto, tech, and energy industries. She lives with her spouse and dog in Grand Rapids, MI.

  1. klynn says:

    In other words, Immelt and GE aren’t about building the jobs American needs (for graphic representation of that, see this post). Rather, they’re about transforming the fruits of American manufacturing into yet more destabilizing casino games.

    And that’s what Obama picked today to lead his election-season effort to appear serious about job creation.

    Hammer this point. Over and over.

  2. bluewombat says:

    That was my first thought as well: you picked the pioneer of sending jobs overseas as the head of a job commission? Obama isn’t even making a pretense of giving a rat’s ass what people think about him anymore. He won’t realize his mistake until the first Wednesday of November 2012.

  3. Morocco Bama says:

    Obama is not stupid, and not because he went to Harvard Law School, but because he’s doing exactly what he was intended to do, and doing it well. He’s a great, and quite willing, puppet.

  4. jonathangelling says:

    Yay! Maybe Immelt will push to lower those unduly burdensome corporate taxes that are hurting our competitiveness:

    “Meanwhile, GE said its fourth-quarter tax rate came in at an unexpectedly low rate of negative 17%, contributing about 10 cents a share to earnings.”

    GE Stronger Than Expected 4th Quarter

    Note the company made $3.9 BILLION last quarter and paid -17% in taxes…

    • greengiant says:

      From 2007 through 2009, 80 Billion in income, and 10 Billion in taxes, not all of which flows to the US or the states. Another company, Google, is paying about 2.4 percent of income in US taxes while reporting it is paying about 20 percent of income in income taxes.

  5. 4jkb4ia says:

    Abandoning 2010 to the FCIC was useful in times like this. Here is a GE Capital executive answering Born’s question about why they survived, relatively speaking, when the commercial banks did not:

    COMMISSIONER BORN: What aspects of your model
    24 have protected you from this turmoil?
    25 WITNESS NEAL: I would say we originate assets to
    1 hold. We only originate assets to hold. And what I mean by
    2 that is, if we did a transaction that was for 10 years, we
    3 look at the risk in it as a 10-year risk.
    4 Others, particularly in this period of time when
    5 originate-to-sell or distribute became such a popular line
    6 of business, your risk, the way you think about it is very
    7 different. You may have it in your warehouse for 60 days.
    8 And so the underwriting becomes: Can I sell it? Not will I
    9 hold it to maturity.
    10 And because of that, our portfolio, our losses,
    11 which we’re not immune to this cycle, but our losses have
    12 performed well below the Fed cases. And so the business
    13 itself is less impacted because of that.
    14 I would say another thing is that we, again we
    15 match-fund everything. And when we borrow, if we have a
    16 transaction in Australia and we can’t raise Aussi dollar, we
    17 might raise that here and then swap into that If we have a
    18 five-year transaction and five-year money is not the right
    19 way to raise capital that day, we may raise something else,
    20 but we swap into that.
    21 We do not–we do everything we can to only take
    22 credit risk in these transactions that we have. So I think
    23 that’s a piece of it.
    24 We were AAA. We were downgraded to AA, but
    25 stable. Everybody–there’s no one left. I mean, the whole
    1 industry was in the first quarter of last year, but we were
    2 able to get through this.
    3 I think G.E. is an enormous source of strength
    4 for us. When things got difficult, when we got concerned
    5 with these markets, we cut our dividend. This is the
    6 dividend from G.E. Capital back to G.E. It was 40 percent.
    7 We brought it down to 10. We eventually brought it down to
    8 zero just to keep capital in the company.
    9 We adopted a program which we called “Safe and
    10 Secure” at that moment in time. G.E. raised equity and put
    11 equity into G.E. Capital–not the government, G.E. did that.
    12 So a huge source of strength for our company in that regard.
    13 We became very conservative at that period of
    14 time. We took our commercial paper down. Today in the mid-
    15 40. It’s less than 10 percent of our stack. We raised
    16 cash. Today we have over $60 billion in cash on the balance
    17 sheet. We have $52 billion in backup bank lines. So today
    18 we have 2-1/2 times coverage on the CP program. It’s
    19 expensive, but it is very safe, from that standpoint.
    20 So when we saw what was coming–and of course the
    21 company itself, the stock took a beating during this period
    22 of time, although it’s coming back nicely now; but we
    23 adopted, we thought, the right strategy with our investors
    24 to make the company very safe, and we have.

    Earlier in the hearing Angelides asked if they needed to take the money. Neal said that for commercial paper, there was a flight to quality and they probably could have made it, but for the FDIC program he didn’t answer.

  6. onitgoes says:

    Thanks for this post. Should be broadcast far and wide, so that the serfs can get who their true Masters are. Anyone who thinks that Obama and/or the corporate Oligarchs are in any way *interested* in the piffling, trifling concerns of US serfs – as in need for jobs, etc – they’re living in a fool’s paradise of abject denial.

    Behold your emperor, who wears no clothes. How fine are his raiments.

  7. Gitcheegumee says:

    The GE Watch, from Inner City Press / Fair Finance WatchInner City Press / Community on the Move and the Fair Finance Watch have become increasingly concerned with the lack of consumer protections at GE Capital, …

    http://www.innercitypress.org/ge.html – Cached – Similar►

    Inner City Press — (some) About Us2007: Inner City Press, headquartered in the South Bronx of New York City, …. In late April 2003, ICP began a GE Watch, of GE Capital, GE Consumer Finance …

    http://www.innercitypress.org/aboutus.html – Cached –

    The Movement(s): Anti-Corporate Globalization coverage from Inner …In connection with Inner City Press’ just-launched GE Watch, we offer this update on GE’s continuing involvement with the controversial (human rights …

    http://www.innercitypress.org/movement.html – Cached – Similar

    NOTE: Inner City Press has a long running,continuously updated coverage on GE’s financial activities for a some time now. Definitely worth a look.Info seldom published elsewhere.(The Citicorp Watch,and Wells Fargo Watch are of note,also.)

    I am speechless at this appointment of Immelt.

  8. 4jkb4ia says:

    I would like to see the followup post on the debate in the analyst community, too. Now I am really gone.

  9. Arbusto says:

    I worked at GE Nuclear in ’81, when John Welsh increased profits and made investors happy by making the workforce, with 200,000 fewer employees, maintain output. I don’t know if Carly at HP and other CEO’s used his employee scalpel as a template, but GE sure didn’t have many happy employees back then.

  10. Gitcheegumee says:

    I found it particularly intriguing that the first lady chose to do PR work for WalMart this week.

    Especially interesting since this week was the same week for Hu’s visit,and WalMart is China’s top customer.Now the plot thickens with the anointment of GE’s Immelt. Coinkydink?

    GE and WalMart have historic ties.Forthwith an excerpt from BNET,2007:

    Wal-Mart has tried several times over its 45-year history to get federal approval for an Industrial Loan Company charter (a banking license), and each time it’s been unsuccessful. The retail king withdrew its latest application last March, a move Sheila Bair, the FDIC chairman, called “a wise choice.” But in spite of the federal obstacle, Wal-Mart announced today plans for a major expansion of its financial services offering, including a new pre-paid money card and 1,000 new money centers by the end of next year. A New York Times article by Michael Barbar and Eric Dash reports:

    Much of what Wal-Mart announced today [pre-paid money cards and new money centers] will be directed at consumers who do not use banks. Wal-Mart says, for example, that 20 percent of its customers — about 36 million people — do not have checking accounts.The so-called Wal-Mart Money Card, to be issued with GE Money, a division of General Electric, would allow customers to transfer their paychecks directly onto their cards, make purchases through the Visa network, pay bills, or withdraw cash from A.T.M.’s.

    Customers who use the cards can avoid carrying cash and do not need the legal documentation required for opening traditional bank accounts. There
    With the GE partnership and this new line-up of financial services, it seems that Bair was right when she said “They don’t need an ILC to play an important role in expanding access to financial services, they can do so by partnering with banks and others.”

    GE Helps Wal-Mart Solve Its Banking Problem | BNETJun 20, 2007 … Wal-Mart has tried several times over its 45-year history to get federal approval for an Industrial Loan Company charter (a banking license) …
    http://www.bnet.com/blog/intercom/ge-helps-wal-mart-solve-its…/365 – Cached

    • onitgoes says:

      Thanks for that info. Unsurprising and completely typical. Yeah: Michelle Obama shilling for her Chinese overlords via WalMart. Thanks for nothing, Michelle… taking your “lead” from your mentor, Nancy Reagan, I see…

      • liberaldem says:

        Michelle’s doing the prep work for whenever Barack is out of the White House, and both of them will be on corporate boards and further feathering their own already cozy home.

  11. Tracerfan says:

    Just when you think the stench can’t get any worse, it does.

    We are screwed regardless of who wins in 2012.

  12. canadianbeaver says:

    Does it really matter any more? Look at this entire administration. See anything? Apparently, one day the American Dream was changed to “only if you are a corporate stooge, or filthy rich, or both.”

    And still, the progressive universe all over the internet screams “Clap louder!”. I love FDL and all it’s contributors, but I’m sorry, you are all flogging a dead horse. The only real progressives left in the US are people like Howard Dean, Pelosi, Reid, and DKos contributors. When Bush was in power, all these stories would be met with screams. Now they are all being met with a shrug and a “you just want Obama to fail.”

    • solerso says:

      And GE has got to be the face of the absurd, competely rotten US monopoly capitalist system, and everything associated with it.Jeff Imelt is the face of 21st century monopoly capitalism and his appointment is iconic of corrupt revolving door corporate owned politics. The crumbling US state.

    • solerso says:

      No, not flogging a dead horse. I didnt happen on FDL just yesterday but many people did, and more will tommorow. The only meaningful way to fight back at this moment, is to beat the drum until enough people have assembled.There will be no grand electoral political scheme. No “good” democrats are going to show and rescue us. As long as people believe what corporate media propaganda is telling them, (and GE owns a huge peice of that) then there is truly no hope. People armed with true facts, and given context, will become a genuine movement, when there are enough.

    • cate says:

      I’m confused. Are you serious when you say that Dean, Pelosi and DKos are the only real progressives? Dean supported Obama’s pick of Bill Daley. All of them supported the so-called health bill.

  13. CTuttle says:

    OT-This is utter BS…

    Outspoken Tucson sheriff faces recall bid

    Tea party group wants Dupnik out

    Pima County Sheriff Clarence Dupnik has never lost an election, but that was before his remarks assigning blame for the deadly Tucson, Ariz., shooting to political “vitriol” and calling Arizona “a mecca for prejudice and bigotry.”

    If any Sheriff needs to be recalled, ‘Pink Undies’ Arpaio tops the list…! *gah*

    • Tom in AZ says:

      It is truly unbelievable except in AZ. It is through the looking glass here. That Arpaio in not the one people are after says it all. And that is because Dupnik is absolutely right. People don’t like to be reminded of their failing to be decent human beings.

      • CTuttle says:

        Aloha, Mi Amigo…! My condolences…! A lot of raw nerves I’m sure…! I was mightily impressed with the send off of Giffords today… Kudos…! *g*

  14. jpe12 says:

    Konzcal’s metric – debt guarantee divided by deposit – is a profoundly stupid, misleading one. GE’s finance arm isn’t a deposit-taking banking institution; it’s a finance corp that provides unsecured loans.

    • prostratedragon says:

      Yes, it is a particular stupid metric with which to illustrate this point:

      To put that in perspective, only about $24 billion of GE Capital’s funding comes through deposits, allowing a shadow bank with massive unsecured debt obligations and only a small depository base to be carried through the financial panic.

      • jpe12 says:

        It’s not a bank, so of course it doesn’t get funding through deposits. It’s like criticizing Barnes & Noble for not taking deposits. It’s criticizing an apple for not tasting like an orange.

  15. PeasantParty says:

    EW, I have to applaud you on this post. Two weeks ago I set out to do a small post on how GE is raping and pillaging America with its govt. funded welfare.

    As you know, I’ve been struggling to pay my mortgage since being laid off two years ago. I became so angry that I could not go forward. All the branches of GE, banking, medical, military, communications, security, and on were flashed on the screen constantly with the billions of our tax dollars going to them to subsidize it all.

    Look how much this mega-conglomerate, mult-national paid in tax! Yet, they say they are being bombarded and kept from being competitive due to taxes.

    My heart still hurts and my mind cannot wrap around the criminal aspects of each subsidiary of GE!

    Gee, GE! How much more?

  16. EarthquakeWeather says:

    Obama to dirty hippies (and all non-corporate stooges): drop dead.

    I would say he’s following the Clinton model to re-election but by 2012 Clinton is going to look like Noam Chomsky compared to this guy.

  17. jdmckay0 says:

    I’d also remind, GE financial shenanigans go back through the (both) Welch era’s. There was the Kidder Peabody bond scam. Whole bunch of Defense Contractor thingies as well.

    And wasn’t Jack telling NBC newscasters what to say during 2k election night & recounts?

    Good article from Rortybomb, Marcy. I recall a number of times in early Bush era, seeing GE Capital profits… scratching my head wondering how they could generate 40% returns? I never had evidence, but with all the other black stuff they were doing, always seemed Enron-esque to me.

    Watching BO now, w/enough points along the line, he *always* moves towards big money when tough decisions need to be made. The feeling is kind’a sort’a like seeing one of your kids all of a sudden doing heroin or something. This one (Immelt) especially.

  18. Hmmm says:

    Barry: “Thanks a lot for the backing offer, Jeff, but with the damn Lefties jabbering at me, I just don’t know if it’ll do enough good. I mean, the foulmouth feminist blogggers and your boy Olberman won’t let me get away with anything any more! Keep remindin’ folks about all the promises I made ’em last time ’round.”

    Jeff: “Well… let’s just say we might be able to help you out there too.”