Why GE Is Still a Good Short

We noticed on one Moody's report that GE Capital was deemed not to be a standalone Triple A but kept on its perch because of a "strong parental guarantee."

When we finally read the legal document held out by Moody's as a guarantee, we concluded that it was a best a weak "keep-well" agreement. So then we started thinking how strong the businesses outside GE Capital seemed to be from the standpoint of delivering reliable, growing "free cash flows," not simply imaginative slogans. After a lot of work, and well before the implosion in wider market value, we concluded that the "strong parental guarantee" would actually be little true comfort in a moment where savvy investors rushed to question GE and get to the heart of their dense disclosures.

In short, we felt in August 2007 and we feel now that the untapped credit capacity of GE (without government help) is not sufficient to shore up GE Capital. especially in weakening macroeconomic conditions that must hurt all of GE's businesses, perhaps more than most.

A second area of concern lies in the continuing SEC investigations that are not, at this writing, resolved. A key risk to our short recommendation was the possibility that GE would be deemed "too big to fail." Instead, because of this regulatory attention, we felt the U.S. government would have political difficulty affording significant continuing financial assistance to a company already under SEC scrutiny unless the government somehow admitted, credibly, that investigations, whose origin dates, according to GE, back to Jan. 20, 2005, were not all that significant or even in error.