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Gee, G.E.
General Electric has outlined its battle plan to fight the financial crisis, seeking to preserve its triple-A rating and its dividend.
The conglomerate—whose businesses range from NBC to turbines—said it expected to report fourth-quarter earnings at the low range of its previous forecast. It sees earnings of 50 to 52 cents per share. Analysts have been expecting a profit of 51 cents per share.
Nervous investors have been focusing on G.E.'s giant finance unit, G.E. Capital, amid concerns that it could become the next casualty of the financial crisis. Shares of G.E. have slumped 58 percent this year. The company today detailed how it will shrink G.E. Capital and reduce its leverage. Jobs will be cut and the unit will depend less on the commercial paper market and seek some $80 billion in alternative funding. G.E. will take a charge of as much as $1.4 billion to pay for cost cuts and restructuring.
"We are taking a number of tough but prudent actions to make G.E. Capital safer, stronger, and more secure during this financial crisis," said Keith Sherin, the company's chief financial officer. "We are committed to being a Triple-A company. These actions include a funding plan that reflects the current market, and we are lowering our leverage ratio and commercial-paper balance. Our forecast anticipates a challenging loss environment. We are also reorganizing the business to reduce costs and allocate capital more efficiently."
G.E. Capital made clear that it would not tap the $700 billion TARP program (which could spark fears of share dilution among investors), but it is taking advantage of two other federal programs: the Federal Reserve's facility to backstop commercial paper and the Federal Deposit Insurance Corp.
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Goldman's Struggles
It is obvious that the business of Wall Street has changed utterly. Goldman Sachs, which had been so clever to profit handsomely last year from the collapse in the subprime mortgage market, has yet to figure how to make money in this new era.
The firm could report a loss of as much as $2 billion, or $5 per share, when it reports fourth-quarter results next week, the Wall Street Journal reports, citing "industry insiders."
Such a loss—which would be the firm's first since it went public in 1999—would top even the most pessimistic of the analysts covering Goldman. On Monday, Susan Roth Katzke of Credit Suisse said she expected Goldman to report a loss of $4 per share for the quarter, which ended on November 28. Her report helped send shares of Goldman tumbling 17 percent on Monday.
"October was a difficult month; November—though we were hopeful—was really no better, with asset prices for equities, credit, and real estate only coming under more pressure," she wrote.
The firm's stake in Industrial and Commercial Bank of China Ltd. and some private equity investments have declined in value in recent months.
The Journal points to problems in Goldman's distressed investments—like golf courses in Japan and troubled auto loans in Thailand—that had been a big profit center.
Other analysts see a more modest loss for the quarter. Prashant Bhatia of Citigroup has forecast a loss of $1.60 per share, while Michael Mayo of Deutsche Bank estimates a loss of 65 cents per share. The consensus estimate, according to analysts surveyed by Thomson Reuters, is a loss of 62 cents per share for the quarter.
It is not as if Goldman has not been responding to the challenge of the financial crisis. The firm has converted to a bank holding company and it has bolstered its capital: selling $5 billion of preferred stock to Warren Buffett, $6 billion of stock in a public offering, and $10 billion of preferred stock to the Treasury. And it has been cutting jobs and shedding assets.
In a speech last month, Lloyd Blankfein, the chief executive of Goldman, acknowledged the new challenges. "We are in the midst of a historically significant and uncertain time for business and the global economy," he said.
Yet he was confident that Goldman would survive and prosper: "I have not lost sight of the fact that many of the most important opportunities in Goldman Sachs's history came about during times of stress. Our firm has proven its ability to adapt time and again, and, more than any other factor, our culture has given us the wherewithal to embrace change."
It has usually not been a good idea to bet against Goldman. But a huge headline loss next week—especially if Morgan Stanley's results look better in comparison—might go a long way toward puncturing the last of Wall Street's myths: that Goldman is a firm of the best and brightest whose unique culture allows it to find and pursue profitable opportunities in any environment.
Perhaps Goldman is not so special after all?
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When Will It End?
As if you didn't know yet, the United States is in a recession.
The nation's business cycle tracker, the National Bureau of Economic Research in Cambridge, Massachusetts, announced anticlimactically today that economic activity peaked in December of 2007, right around the time employment numbers started to head south and four months after the start of the credit crunch.
The Bush expansion—as it may come to be known—does not stack up well against the Clinton boom of the 1990s on many measures. For one, the economy grew for 120 straight months in the 1990s versus 73 this decade. Incomes also grew under Clinton while they remained stagnant under Bush.
Gross domestic product per capita, a rough measure of living standards, grew by 51 percent during the tech boom under Clinton versus 33 percent during the real estate boom under Bush II. (But if you compare the average monthly gain in G.D.P.-per-capita, Bush squeaks out a win: 0.45 percent versus 0.42 percent.)
But the main question on everyone's mind now is when will our bust come to an end?
If you look at the yield curve, historically a very reliable indicator of swings in the business cycle, activity should pick up by the end of 2009.
That would mean that the recession will be longer than many professional economists are forecasting. Which shouldn't be a surprise to anyone, considering what a bad job forecasters did with predicting this recession.
Another recent reliable indicator is actually the N.B.E.R. recession announcement itself. During the two previous downturns, in 1990 and 2001, the N.B.E.R. made its recession call after the actual downturn had ended. Unfortunately, a global financial disaster makes the chances of that good fortune happening this time around close to zero.
In fact, November marks the eleventh month of the current retrenchment, beating the average length of post-World War II recessions by one month. And if the recession lasts past April, it'll be the longest downturn since the Great Depression.
With the N.B.E.R.'s announcement, the U.S. joins a growing group of rich countries that are also in official recessions—a list that includes Japan, New Zealand, and the 15 countries of the euro zone.
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Drastic Plastic
The Federal Reserve is trying to get consumer finance flowing again. The Fed announced a program last week that would provide as much as $200 billion in loans for securities backed by credit cards, auto loans, student loans, and loans guaranteed by the Small Business Administration.
At the same time, however, financial institutions are scrambling to turn off the taps. Meredith Whitney, the banking analyst with Oppenheimer & Co., estimates that more than $2 trillion of credit-card lines will be pulled over the next 18 months.
Such a retrenchment would be devastating to consumer spending, as credit cards are second only to jobs in their importance to consumer liquidity.
"We are now beginning to see evidence of broad-based declines in overall consumer liquidity," she wrote, estimating a decline of 45 percent, according to Reuters.
The credit-card market is lagging the mortgage market by 18 months and will begin to shrink by mid-2010, Whitney said.
Many big lenders have been trying to cut their exposure to credit cards, closing accounts, lowering limits, and instituting higher rates or stricter terms.
Some $21 billion in bad credit-card debt was written off in the first half of 2008 and tens of billions of dollars more in losses are expected.
Capital One, the largest independent card issuer, said in its earnings call in October that it had begun to reduce credit lines.
The chill in the air is consumer spending being frozen solid.
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A Cracked Tudor
Paul Tudor Jones tripled his money by predicting the stock-market crash of 1987. The crash of 2008 hasn't treated him quite so well.
Just as troubled banks have floated proposals to split into two, with a "good bank/bad bank structure," Jones' Tudor Investment Corp. is splitting off the bad investments made by its $10 billion Tudor BVI Global Fund into a separate fund. The Legacy Fund will have lower fees and illiquid assets such as corporate credit from emerging markets in Eastern Europe, Latin America, and Asia. The remaining BVI Global Fund will continue to invest in international stocks, bonds, and other securities.
Jones also told investors that redemptions from the fund would be temporarily suspended, with the expectation they could resume by the end of next March. The fund had received requests for $1.4 billion, or about 14 percent of net assets, which would have left remaining assets holding too much of the illiquid assets.
This news is yet another blow to the embattled hedge fund industry. Jones has long been known as one of the industry's top traders, with his Tudor BVI Global fund returning 22 percent on average annually since it launched in 1986.
"I recognize that a restructuring is an unwelcome, but I believe necessary, step against the backdrop of Tudor BVI's 22-year history of unbroken profitable years," Jones wrote in a letter to investors. "I believe it is but a brief step, however, on the road to important long-term changes for the benefit of all investors."
The news is also troubling because the fund was forced to take these steps despite the fact that it is far outperforming its peers. The Tudor Global Fund is down just 5 percent year-to-date, while the composite index of global funds tracked by Hedge Fund Research is down 22 percent year-to-date.
If investors are that eager to withdraw their money from one of the better-performing funds out there, there's no telling how ugly it has become for the less fortunate managers.
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