As it gets $3 billion from Buffett, will GE lose its AAA rating?

Posted Oct 1st 2008 4:30PM by Peter Cohan
Filed under: General Electric (GE), Goldman Sachs Group (GS)

Another "respected" American company looks to be in a bit of financial trouble. You'll recall that Goldman Sachs Group (NYSE: GS) recently received a $5 billion capital infusion from Warren Buffett. And today, the once-admired General Electric Company (NYSE: GE) accepted a $3 billion check from Buffett in exchange for preferred stock paying a 10% dividend and warrants to buy $3 billion common shares of GE at a strike price of $22.25 for five years.

This comes as the Credit Default Swap (CDS) market is charging GE a rapidly rising premium to insure its bonds. CDSs protecting against a default by GE Capital Corp. for five years climbed as much as 1.25 percentage points to 7.4% -- and last traded at 7%. This increase in perceived risk is happening as GE suspended its stock buyback, shifting capital to protect its dividend and AAA credit rating.

Will these moves be enough to protect GE's credit rating or is getting 40% of its pretax profit from financial services too risky? Who will be the next company to be stricken by this financial crisis? And which of these weak companies will pay this steep price for Warren Buffett's money?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns GE shares and has no financial interest in Goldman shares..

Tags: credit default swap, CreditDefaultSwap, GE capital corp, GeCapitalCorp, warren buffett, WarrenBuffett

Print this

Reader Comments (Page 1 of 1)

10-01-2008 @ 5:01PM

Raybo said...

Probably not gonna see many AAA bailouts. It speaks volumes about the rating agencies. I said elsewhere this would be a rare Buffett error. Raybo

10-01-2008 @ 5:06PM

Allan said...

The infusion of money into Wall Street
is putting it in the wrong place. Issue
scrip redeamable as mortgage payment
to risk-worthy households in imminent
danger of foreclosure. Wall Street will
hate this because they only get indirect
access to the money for a very narrow
purpose.

10-01-2008 @ 7:04PM

justpicky said...

if Buffett want to help anyone out
help the middle class , believe me ,
it will come in good use . The companies
Mr.Buffett owns , he will recieve back
the middle class will buy the products
he's selling .. he has a company selling
mobile homes and much more .
let's see $300 million dollars , he will not miss . Give every one who's 18 yrs old and older , One million dollars and see what plans they will do with it .
The economy would flow . People will spend.

10-01-2008 @ 7:59PM

william lindblad said...

Doubtful. Warren may be old, but he ain't senile.

More interesting: Did you get a load of some of the riders on the Senate bill?

2.5 b - for Amtrack, just for starters. Talk about the pork barrel, pet projects - AKA buy the vote.

I already mentioned UBS, get the word on Credit Suisse?

Keep busy, Bank of Mao is probably a few months off.

2009 will be my time to play Garibaldi.
(no joke)