Like Tyler, I think Samuelson has not done his homework.
Here is Paul Samuelson:
But financial panic engendered by the burst bubble of unsound U.S. and
foreign mortgage lending means that even a mammoth corporation like
General Electric would find it expensive now to finance a loan needed
to build a new and efficient factory.
Here is Jeffrey Immelt, chairman and chief executive of General Electric:
Q: What’s your opinion of the "credit squeeze" and the view that the US economy may be about to run into difficulties?
A: It’s clear there has been some bad lending behaviour [by banks] in the
US. But in the world as a whole, there is still a lot of liquidity.
Companies generally have strong balance sheets, giving them the ability
to borrow on reasonable terms….If you consider the problems in the credit markets, they will not have
an impact on the vast majority of GE’s business. In other words, the
overall effect on GE will be limited.
Yes, Immelt’s job is to be rosy but profits are strong at GE. I’d like to see some evidence for Samuelson’s statement.
Look at what GE’s stock did throughout the credit crunch. It had a negative correlation to the market. Why? Listen to GE’s conference call if you have the time….
http://www.ge.com/investors/events/event_id10122007.html
Two key paraphrases from the conference call.
1) During the financial meltdown people were running to us to buy our CP, and it lowered our short term cost of debt(or kept it from rising anyway).
2) We will NOT have to write down a significant amount of our real estate portfolio. Why? Because we underwrite to hold, not to flip. So we make sure they are good investments.
He merely says “General Electric would find it expensive now finance a loan”. Not impossible or even difficult, just more expensive. In a credit crunch where liquidity has dried up, borrowing money is presumably more expensive than it used to be, even for a company with a solid credit rating. The need to offer a higher interest rate for bonds might even make certain projects uneconomical to pursue.
He’s not claiming that GE is in financial trouble of any kind, so mentioning GE’s profits is beside the point.
Samuelson has a point.
First of all, half of GE is a finance company, or GE is half finance, so it’s likely
experiencing at least some of the liquidity and credit issues that other, more purer,
lending insitutions are.
Secondly, remember when, famously, a certain bond investor (I think it was Bill Gross)
basically said ‘no mas’ to GE’s commercial paper program? Liquidity dired up in about
a day. It was really pretty drastic for GE then. Even though GE is AAA rated, it’s so
big and it’s financing demands are so great, that just doing normal business with it
could create a larger than desirable credit risk.
The fact that GE’s profits are strong is a reason why it is not having any trouble borrowing. It is also highly relevant to Samuelson’s underlying argument that the subprime crisis is spreading far and wide. See also Tyler’s commentary.
Do you mean that Don Geiss is not actually president of GE? My world is shattered.
His last statement is also nonsense coming from an economist. I guess he’d want an MRI on an ingrown toenail.
One of the first metrics you should look at when assesing a bond risk premium to a company is times interest earned.
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