DAVID MAGEE WAS starting to get the sense that he’d been stood up. Magee was a gregarious Mississippian business writer who specialized in books about corporate overhauls, turnarounds, and reinventions. He had written about thoughtful CEOs reshaping companies like Toyota, Nissan, John Deere, and Ford and was just the right guy, the image-shapers at GE thought, to write a story about Jeff Immelt that would remove him, at last, from the celebrity shadow of Welch.
Their timing could not have been worse.
GE handlers had given Magee access to executives like vice chairman John Rice and research head Mark Little, as well as time with Immelt himself. There was only one interview left on the writer’s list, to be conducted in the sun-splashed office adjoining Immelt’s at the company headquarters in Fairfield. Magee was to meet with Keith Sherin, the chief financial officer.
But on the appointed morning in the fall of 2008, Sherin canceled. Despite follow-up requests, the interview would never happen. As the pressure on GE mounted, Keith Sherin had somewhere else he needed to be.
The notion that had panicked investors and driven GE’s stock price far below its true worth was a perfect pitch to one investor in particular: Warren Buffett, American business’s patron saint of finding value where others had missed it. An investment from someone as well regarded as Buffett might provide GE with a level of legitimacy that so far its own marketing machine had failed to secure.
In the chaos of the financial crisis—marked by extreme market swings, political uncertainty, and a turbo-charged rumor mill speculating on the next domino to fall—the financial services side of GE was simply too big to ignore. The solid fundamentals of the company—its massive industrial backlog of orders, its ability to generate cash, and its collection of hard assets—meant nothing to investors who had no desire to catch a falling knife.
In short, words didn’t matter anymore. GE needed to show that the distressed markets were contorting its true value and that it had been wrongly caught in the torrent that was drowning others.
Warren Buffett, the billionaire investor with a folksy midwestern flair, was just the person to lend legitimacy at a time when GE couldn’t convince people of its stability. He was also a businessman who understood that he wasn’t just lending money when he made an investment—he was endorsing the target’s fundamental strength. Buffett said that he wouldn’t put money into a business he didn’t understand, which was one reason he passed on helping American International Group Inc. (AIG) during the crisis before it was taken over by the government. His investment in GE would send a strong signal to the market.
But his investment came at a cost. Buffett, a veteran insurance investor who got his start handicapping horses, understood risk and dictated steep terms to reduce his exposure.
Just a week earlier, he had invested $5 billion in Goldman Sachs, another firm he thought was a victim of a mass hysteria that was distorting the value of possibly the best business on Wall Street. If Goldman had to pay, so did GE.
Buffett bought $3 billion in GE preferred shares, collecting $300 million in annual dividends, and he also received the right to buy $3 billion in GE common stock for $22.25 a share for five years.
The deal took only a few days to come together. For Buffett, it was a straightforward decision that he famously made early in the morning in his bathrobe from his house in Omaha.
It came at the right time. GE shares were down sharply, more than 10 percent that day, after a Deutsche Bank analyst came out with a negative assessment of GE earnings forecasts, citing the risk in GE Capital and the potential trouble within. When the news of Buffett’s investment broke in the middle of the day, it came to the rescue and had the exact impact GE management wanted: the stock recovered much of its value.
Besides the $3 billion vote of confidence from Warren Buffett, GE said that it would also sell $12 billion in stock in a public offering. This announcement was made only six days after Immelt’s latest assertion that GE wouldn’t need to make such a move.
For a company that depended on the credibility of its assurances and the trust of investors, it was sending a lot of mixed messages on Wall Street. The stock offering was no small undertaking, and it only confirmed the impression that GE was seeking a frighteningly large amount of cash on short notice.
The reversal was also expensive. GE had been repurchasing its shares right into the early days of the financial crisis, even as its shares were dropping. So far in 2008, the company had spent more than $3 billion buying its own stock. And in 2007, GE had spent $15 billion on its shares. Over the entire period, GE paid an average price of about $37.50 for half a million shares worth more than $18 billion. Now, it would sell almost 550,000 shares back to the market for $22.25 a share in order to raise $12.2 billion. By selling shares back to the market at a much lower price, GE was wiping out more than twice the amount of cash that the deal with Buffett had yielded. It was a disastrous use of the equity markets, and it wouldn’t be the last time.
On October 7, the government brought GE some relief from the commercial paper crunch when the Federal Reserve created the Commercial Paper Funding Facility, which let companies buy three-month commercial paper from high-rated issuers. Paying a $100 million fee, GE signed up to join the program, which was scheduled to begin in less than three weeks.
Days later, GE reported its earnings and executives held a conference call that highlighted the steps taken to protect GE from volatility and economic disruption, including reductions in risk. Immelt insisted that GE’s leaders had made moves that would enable the company to “outperform in any environment.”
When it came to funding, GE never had a problem.
“Even with all this volatility we have never had issues in the CP market rolling our paper,” Immelt told investors, assuring them that the company was just being safe. The message was that the problems in the financial markets were very serious, but not for GE. As always, GE was an exception.
“I think we thought it was smart to have suspenders on suspenders on suspenders in this cycle,” Immelt said, explaining the company’s moves to batten down the hatches. And yet, within days, Immelt would be imploring the government to give GE access to insured funding.
A week later, in the middle of October, the Federal Deposit Insurance Corporation (FDIC) created the Temporary Liquidity Guarantee Program (TLGP), which would guarantee the debt issued by FDIC-insured banks, a qualifier that excluded GE.
Paulson called Immelt on a Sunday morning, according to the former treasury secretary, to explain the program to him and warn him that GE wouldn’t get help. Paulson asked if it would be better for GE if the program happened or if it did not—and he was impressed with Immelt’s answer.
“Maybe a lot of my guys would disagree with me, but the system is so vulnerable you should do whatever you can do, and we’ll be better off than if it hadn’t been done,” Immelt said, Paulson later wrote in his book.
Immelt seems to have misspoken. Inside GE, the new program was seen as a real problem that could make their difficulties in the commercial paper market much worse. GE issued more commercial paper in the United States than anyone and was highly trusted by the counterparties buying the paper. But the stress and uncertainty in the commercial paper market during the crisis caused everyone to reduce their use of it—including from GE—and now investors could buy paper guaranteed by the US government.
What made GE attractive in times of financial turmoil, besides its reputation, was its triple-A credit rating. But this time was different. With storied Wall Street names going out of business overnight, there was simply no appetite among investors for risk backed by faith in any corporation. The FDIC program offset that fear as it tried to jump-start the market, but it also effectively blocked GE from the market because no investor would voluntarily buy GE’s nonguaranteed paper.
Just a day later, Immelt was back on the phone with Paulson, telling him that his people were anxious about what this program would mean for GE. “I’m worried about my company and our ability to roll over paper in the face of this,” he said, according to Paulson.
Immelt was in Paulson’s office two days later to argue that GE needed to be covered by the umbrella of the FDIC’s program. GE was actually making the middle-market loans that banks typically didn’t want, he argued, and now it was being punished in a dangerous way.
Paulson agreed, but needed to convince the head of the FDIC, Sheila Bair, a fifty-four-year-old Kansas Republican who spoke her mind to authority. She believed that taking risks brought rewards but also punishment. In other words, if someone made a bad bet, they should lose their money.
It was a pure interpretation of how markets should work and a major topic of debate around the financial crisis. The markets needed to have winners and losers. Intervening in the markets to help those who made bad decisions, no matter how calculated, distorted the risk taken by participants. That could have an impact on future investment behavior if risk was seen as having finite limits while returns had no corresponding ceiling.
Bair had fought to address aggressive practices in the subprime mortgage business and had waved warning flags at a time when few others were paying attention. During the financial crisis, which landed right in the middle of her five-year appointment, she asserted the power of her agency, which typically went about its work in a far corner of the financial regulatory framework. She had also shown a willingness to butt heads with Paulson and Geithner. Immelt went to visit Bair in person to give her the pitch for getting GE into the FDIC guarantee program.
In her memoir, Bair noted that the plan created a “huge competitive disadvantage” for GE because it allowed banks to sell FDIC-backed bonds. She mentioned Immelt’s call and his visit to her office, noting that his request was supported by both his regulator, the Office of Thrift Supervision (OTS), and Paulson.
Bair asked for an examination from her staff. They found that GE’s capital position, risk management, and information controls were favorable.
“I decided to approve it once Immelt agreed to have the commercial side of GE—the one that makes everything from lightbulbs to jet engines—guarantee us against loss,” she wrote.
The FDIC changed its position to allow affiliates of FDIC-insured banks into the new program. GE just happened to own an industrial bank in Salt Lake City called GE Money Bank. It was FDIC-insured. GE was in.
After repeatedly asserting that it didn’t need help, GE would use the government guarantee to sell almost $131 billion in debt through a staggering 4,328 different issuances. The second most active issuer, Citigroup, had just 1,655 issuances.