What If Big Media Became a Systemic Risk?

During today’s hearing, in the context of asking why the Administration was somewhat urgently pressing its proposal for systemic wind-down authority first, John Campbell (R-CA) asked Tim Geithner whether there were other non-banks that constituted systemic risks that might fail.

TG: In context of proposals for more accountability. They need to be viewed together. We’ll work with committee on best legislative vehicle. Understand can’t do this piecemeal. 

Campbell: Why move on this separately. Are you expecting additional non-bank failures.

TG: [Again no real answer]  It would be in the interest of the country to make sure we’ve got broader rules. Less costly for the taxpayer.

Geithner pretty pointedly didn’t answer that question, which doesn’t reassure me that there’s not another AIG out there.

Which is why I find it interesting that Ed Royce (R-CA) brought up one of the other entities that–like AIG–chose to be regulated by the Office of Thrift Supervision rather than a stricter European regulator: GE.

GE held a panicked investor meeting last week to lay out the status of GE Capital, and has failed to meet a number of recent promises.

Shortly before announcing first-quarter earnings in 2008, [Jeff] Immelt—who was not at the Mar. 19 session—said the quarter’s results were "in the bag," only to miss the quarter’s number significantly.

Then last fall, Immelt said the company would not need to raise new capital—not long before it sold $3 billion in preferred stock to Warren Buffett and announced plans to offer at least $12 billion in stock to the public. More recently, GE slashed its dividend 68% for the second half of 2009, following months of stating that it would maintain its dividend for the year.

And, as happened to AIG last year, ratings agencies have been cutting GE’s credit rating.

Oh, and there’s that bit about GE’s media employees being asked to put off raises for a while.

Now, at least some observers are advising not to be too concerned about GE–so I will assume that Royce was presenting a scary hypothetical rather than predicting the demise of GE. And I will take it as Royce presented it–a big what if?

What if the world’s largest non-bank finance company attached to the arms and lightbulb manufacturer attached to one of the biggest media companies in the US were considered a risk to our finance system? What if FDIC and Treasury and the Fed grew worried that NBC’s parent company was sinking under the weight of GE Capital’s defaulting loans and started thinking about "resolving" it? How would we expect Jim Cramer or Chuck Todd to act?

Like I said, I don’t think GE Capital/GE/NBC is going down–they’ve got some crummy loans in a terrible economy but I don’t think they’re leveraged that badly. But for some reason, Royce’s hypothetical really hits home where this systemic problem could go.

But then, it was always a horrible idea to have one of your biggest corporations and non-bank finance companies own one of your biggest media companies. 

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69 replies
  1. PJEvans says:

    It’s a bad idea to let any company get so big that its failure damages the national economy.

    (Well, some of us who aren’t GOoPers or Wall Street financiers think so. YMMV.)

  2. JohnLopresti says:

    GE builds nuclear reactor electric generating plants. Rescuing a collapsing GE by state appropriation of its toxic assets would be a mistaken course, one toward which many Obama advisors would like to impell decisions, given the hype flak out there already trying to fool environmentally concerned people regarding whether producing more radioactivity is a wise course for the planet and its inhabitants.

  3. phred says:

    It’s interesting speculation, but I would bet that if GE Capital was on the verge of taking down GE, then Timmy would have some company at that Congressional table… Gates would be joining in loudly on the chorus of Too Big To Fail…

    • emptywheel says:

      Well, the advantage of unwinding GE is that one of its prime market has experienced no slowdown at all. So presumably we could demand top price for it.

      In other news, we just gave AIG aircraft leasing–in which it competes with GE–almost a billion more in financing.

      • phred says:

        I’ve clearly not been reading the fine print — I didn’t know AIG was into aircraft leasing ; ) What do you bet Immelt is crying foul at Obama’s economic team coffee klatches these days?

  4. wavpeac says:

    Large scale control fraud. 80% of all financing contains accounting fraud. Eventually the bottom line will become the top line and the truth will be told. The story has not yet been fully uncovered.

    William Black.

  5. NelsonAlgren says:

    Considering that CNBC is filled with hacks(except when guests like Dr. Dean, Roubini or Barry Ritholtz are on), it would be tempted to hope they go under. Anyway, don’t be so sure about GE being in the clear. GE Capital was always the key to their success. It was how Jack Welch always made the numbers(and then some). We don’t know how leveraged GE really is. Stocks don’t take for nothing(despite sometimes seeming like it).

  6. TheraP says:

    GE is closing down their money funds called “GE Interest Plus” on April 15. Anybody know what that fits into this picture?

    Apparently they sent out a letter to anyone who (still) has money there. Not me. But I know someone who used to work with them, has lost a ton of money on GE stock and has money with them too.

  7. Hugh says:

    What about Big Macs and Taco Bell? I’m pretty sure there are some systemic risks, my system anyway, associated with them.

    • bmaz says:

      Hugh – You can take McDonalds down as far as I am concerned, but don’t mess with Taco Bell and Jack in the Box. My system needs those two terribly!

      • PJEvans says:

        YMMV. I prefer Mickey D’s to Jack’s. (In-n-Out beats both.)

        I suspect that the trouble starts when the financing side of the business gets to be more important (to the guys at the top, anyway) than the physical-product side.

      • nextstopchicago says:

        I think you’re being too big business-oriented.

        Taco Bell is not too big to fail. I can think of a hundred taco places in my immediate neighborhood in Chicago that are better, cheaper, and poised to fill the void for you.

  8. Teddy Partridge says:

    Maybe Chuck Todd can suggest something that we Americans can sacrifice in order that GE can continue on its merry way, and also make up his foregone salary increase….

    • Blub says:

      hehe. That and they covered up the sign at their headquarters. What to do when your brand is held in worse regard by the American consumer than any member of the Axis of Evil. Time for more fees to Burston Marsteller, I think.

    • MaryCh says:

      ?? I understand the Blackwater name is available, as is the Condoleeza Rice (if they have any ships/planes that need renaming…)

  9. oldnslow says:

    Isn’t GE Capitol the largest financer of last resort? Have they already bailed on that business and I missed it? Given the economic climate isn’t it catstrophic to allow businesses that could benefit from Chapter 11 in the long run (and keep some or most of their people working) to go Chapter 7 for lack of funding?

  10. MadDog says:

    GE – We bring good things to light!

    This makes so much more sense now! /s

    Thanks Jack Welch, for promoting a whole generation of Ayn Randian Galtistas:

    “Good business leaders create a vision – Let’s fail!, articulate the vision – Fail, fail fail!, passionately own the vision – I am Fail!, and relentlessly drive it to completion – Wheeeee! We’ve failed!

  11. AlbertFall says:

    Federally funded news trusts now.

    Take over NYT, WaPo, McClatchy–buy stock on the cheap, pay off debt at cents on the dollar, then attach them to a non-profit endowment with public oversight–$10b each ought to provide decent seed money.

  12. Jane Hamsher says:

    Over the years, it seems, G.E. got hooked on finance. And it is hardly alone, as the financial sector as a share of the economy increased steadily over the last two decades. Finance rose to 35 percent of total corporate profits in 2006, before falling to 19 percent by the end of last year, according to Economy.com.

    http://www.nytimes.com/2009/03…..f=business

  13. JohnLopresti says:

    When I worked at GE, a supervisor in a neighboring unit convinced me there was a clash of kultcha, nukes, he said, he kept mentioning that, he sed he kneu I had to be against nukes. Wierd how some folks can read the expression of even the most restrained employee.

    Maybe they can do rent-a-media, preconfigured with rent-an-expert.

    I only tried I+O once, though, cold fries at 10:00 p.m. Someplace, this nocturnal roadster kultcha took a swerve where it should have kept on a goin’. Make that with salsa, but skip the rhumba rhythm, plentiful on the jazz.

  14. punaise says:

    GE Capital holds the note on our (very) small office building. Maybe it will get lost in the paperwork and we won’t lose the building after all….

  15. demi says:

    I just turned on MSNBC and they’re talking about drugs.
    I swear. I swear to Dog, I was talking about, as Loo Hoo suggested, Corn Beef Hash.

  16. Route66 says:

    Back in 2007 Jack Welch was on the TV predicting the sub prime mess would only be a blip on the radar screen. Hmmm, not very accurate!

    Lindy

  17. jawbone says:

    I’m noticing that no one from Team Obama seems to be talking about making those “too big to fail” companies a bit smaller, as in “small enough to fail,” if they find themselves in a failed condition.

    “Making the system work,” now that seems to be the Obama line. Get the banksters, et al, back to where they were or close to that. With taxpayer trillions.

    Ouch.

  18. JohnLopresti says:

    What happened to the good natured diversification into industrial banks some outfits attempted fairly recently, asked rhetorically. GE in recent decades has had sufficient global extensions to balance. Yet, typically presciently, the suggestion of partial embroilment for GE reminds that many companies have entered banking in some form. ?How is the local credit union faring? There is a typically well ranked such entity in our county which claims to be doing measurably better than the two largest community banks which each have accepted Tarps already; purportedly business construction and developer financing were the weights which nearly sank them awhile. We are in an outer perimeter of a metro area, nascent tracthome paradise it was looking to become, then Bear turned keel up, bank execs took impromptu leaves last year reading the approaching turbulence’s meaning for their reserves. A Geithner excerpt video in prior thread pretty portentious, and some respected traders/economists on radio today saying his arrayed suggestions for collateralization requirement revisions seem appropriate, link.

  19. klynn says:

    EW,

    Thanks again for all your posts this week and liveblogging.

    bmaz, thanks for the laughter during a dim moment in history.

    Interesting note in terms of talking with the public. There are a number people out there who just think we are “in a low economic cycle” and that we will hop out of this low time.

    What the —- are they smoking?

  20. pete says:

    Oh, and there’s that bit about GE’s media employees being asked to put off raises for a while

    are the executives at ge included in this?

  21. Ishmael says:

    Also of relevance in these troubled economic times, GE Capital was reported in the WSJ in October to have gotten out of Debtor in Possession Chapter 11 lending, in which it was the market leader and made a lot of money – the DIP lender money in an insolvency is last in, first out, primed security and high interest and fees as well.

    http://online.wsj.com/article/…..43955.html

    Whether this was due to a cash crunch or worries that companies could only be liquidated in the present crisis is unclear – GEs website says they are still in the business but only when it “makes good business sense” – i any event, the lack of DIP financing on reasonable terms or at all is a big problem for any company that is trying to restructure.

    • bmaz says:

      That is a huge deal to the Bankruptcy jurisdiction. No DIP financing means chapter 7 liquidation as opposed to chapter 11 reorganization for many companies. There are not that many entities that did large DIP work; GE Capital pulling back is a huge deal. As folks may recall, this is something we have discussed in relation to GM. Everybody talks about a pre-packaged chapter 11 reorganization, but for that there has to be DIP financing, For something like GM, it will be huge money for that. There is no entity out there that can currently cover it; it would have to be done by the Federal government. If the government is going to be the one to do the financing anyway, why not make it loans without bankruptcy? Well, there is not a good answer to that question, and that is why there should be no bankruptcy for GM.

      • Ishmael says:

        Who (resurrected) the electric car? GM with the Volt and now Tesla….

        Tesla rolls out new sedan
        http://www.cnn.com/2009/US/03/…..index.html

        If Tesla can manufacture a kickass electric car, IN THE US, for $57k on a production run of only 20,000 vehicles, there is great hope for GM, which is far ahead of others when it comes to electrics.

      • JThomason says:

        I was on the Amtrak from Albuquerque to Los Angeles a few years ago and with the community seating in the dining car ended having dinner with a retired manager of Wells Fargo foreign credit operations. I pressed him a bit concerning the business in China with the clear risks to collateral with an uncertain legal system.

        I didn’t get a direct answer but it seemed to me that the collateral was not the main concern in the model WF was deploying. Instead their profit model seemed to be premised on strong transactional liquidity i.e. cash flow.

        This really is not inconsistent with some of the objectives of the stimulus and is instructive with regard to the mind set of contemporary credit managers. Arbitrage value certainly has a different feel from an equity model.

  22. klynn says:

    It appears, with all evidence on GE, we may move this conversation from “what if” thinking to “thinking”.

  23. PPDCUS says:

    Living in a world where GE, etal. are too big to fail

    Right now, we need three pieces of legislation enacted in congress and signed by Obama without signing statement revision like these laws from our history:

    1) Glass Steagal Act to restore a safety firewall between Wall Street speculation and the fractional reserve bank system.

    2) The SEC Act to restore regulatory control over markets and make its principals & fiduciaries accountable to investors and the public.

    3) Sherman Anti-trust Act for corporate divestiture reducing the size and power of firms that are too big to fail.

    It starts with human beings who lead corporations and wield power in government. When neither can be trusted to factor the public good into their calculations, the end result is monopoly and feudalism.

      • PPDCUS says:

        I’d add two others:

        4) A new FEC Act cutting off the legalized bribery that has poisoned our political system. We need to rethink how money equals speech if we are to have any chance of preserving, protecting and defending the Constitution of the United States.

        5) A new FCC Act democratizing & diversifying access, production of content, and expression of viewpoint in media channels.

        Have I missed anything?

        • stryder says:

          It seems that the IMF/elites have other plans,

          There’s been a common phenomenon in the third world over the past three decades or so. A country’s financial sector, in collaboration with the larger financial world, would create some type of gigantic economic fuck up. The IMF would then (in collaboration with the local financial elites) step in and provide loans in return for what was called “structural adjustment.” Structural adjustment involved getting rid of any kind of social spending that made life bearable for everyone else.

          In other words, the country’s financial elites would use the catastrophes they’d created themselves in order to do what they’d always wanted to but couldn’t get away with in normal times. They took the profit, and then imposed all the costs on everyone else

          http://www.tinyrevolution.com/…..02902.html

          • PPDCUS says:

            After reading John Perkins book in 2004, I knew how this inevitable reckoning would play out.

            The tables are turned now, but just like IMF/World Bank imposed structural adjustment in the developing world, the American people will pay the tab while their leaders walk away more powerful than ever.

            It was only a matter of time.

  24. PPDCUS says:

    We end up with a media industrial complex, where propaganda displaces journalism, as Greenwald described recently:

    Imagine if you walked into a random class in a journalism school and asked one of the students why they enrolled in journalism school, and they replied this way:

    I want to become a journalist so that I can help the Government conceal its secrets. Especially when high political officials break the law, I think it’s really important that nobody find out about it. In particular, I think it’s crucial that victims of government torture and illegal spying be prevented from uncovering what was done and imposing accountability on our Government leaders. And the most important thing is that when government leaders break the law, they not be investigated.

    So I want to go into journalism in order to do what I can to help the Government suppress the truth, avoid exposure, and evade accountability — because I think the key role of journalists is to do everything possible to enable the most powerful political leaders to hide what they’ve done from the public. That’s what I see as the most important function a journalist can serve.

    It’s a perfect information delivery system from the lord of the manor to his serfs.

  25. bmaz says:

    Tesla is a nice company, but their technology is nowhere near what the Volt program portends for the immediate and long term future. To be fair, the Tesla vehicles are a different animal than what GM has in store, but still not quite the same level of technical engineering. Also, Tesla may be more precipitous than GM financially, as to keep moving forward with their new sedan at all, they were forced to cannibalize and sell off their R & D facility that was brand new in Michigan.

  26. 4jkb4ia says:

    I think this was FPed, so I do not feel so bad for saying in randiego’s general direction that I knew Mizzou could take Memphis, but NOBODY BELIEVED ME! Not even the president of the United States! I am proud this evening.

      • bmaz says:

        Good grief, no kidding. I think I am still substantially ahead of Obama, but other than that, my brackets have been obliterated. Should have listened to 4jkb4ia about Mizzou, jeebus they are athletic and well coached.

        • Petrocelli says:

          Mizzou’s 3-pointer at the Half must have psyched Memphis.

          Duke got out hussled and out coached by Nova. The pace in the first 10- 15 minutes of their game was unbelievable.

          Do you think, as I do, that people are reading too much into the first day of qualifying at the OZ GP ?

    • MichaelDG says:

      Yes, I’ve been waiting to hear, myself. WTF on the not under oath. And the “only under oath because it looks good” from the link.
      Still no date mentioned. EW? Anyone? I know, OT.

  27. oldtree says:

    GE capital provides purchasing financing for a variety of companies. Mine did in the early days when I needed capital. I think this provides the perfect analogy to how bad things are in this country, and around the world. IF a company that size can no longer loan, is having their credit restricted, and is in danger of bringing the main corpse to it’s casket, you then get a small idea of how the base of the financial foundation has cracked. One of the biggest lenders to small business is now nearly defunct.
    Have you heard the analogy of the quicksand and the earthquake? One scientist will tell you it is the quake, one tells you it is the quicksand. After the total failure of the structure, there is always time to discuss why.

  28. JThomason says:

    The offshoot of arbitrage finance is that obligations all begin to take on the character of high risk unsecured loans that eventually will require discount for a reasonable settlement or a totalitarian strategies for long term service plans as these obligations are centralized. The pie in the sky leverage minimizes factors of actual value.

    It is a picture of the loss of frontier that European power cathected into Colonialism in the 19th Century and which faces the US now. Geithner has something of the mandarin airs of a proponent of a Chinese style meritocracy. In the end the throes to attempt to sustain a large managerial/bureaucratic (i.e. the collection class will out run surplus value in the economy or else its Here Comes Everybody (That’s HCE for short)). I am not saying there are not advantages to a global system but I would question assumptions that we as a species will out grow the niche competitive impulse.

    Obama needs to be more aggressive in pursuing a Rooseveltian pragmatism.

  29. JThomason says:

    or “totalitarian strategies”, even…it snowed up here last night and I have more morning apathy than usual and the coffee is not fully absorbed. In other words the “a” is…well there but hard to justify.

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