GE'sannouncement of a $15 billion capital raise($12 b in common, $3 b in preferred to Warren Buffett with a 10 percent dividend) is difficult news for shareholders, but everyone agrees that two things need to be done:
1) We need a conduit for the bad debt, and that is the purpose of the TARP plan under consideration by Congress.
Mr. Buffett, in an interview with our Becky Quick, spoke eloquently about the need for the TARP, noting that it is only the Federal government that has the capital and the staying power to address this on the level it needs to be addressed.
Mr. Buffett put his money where his mouth is, saying he would take 1 percent of the Treasury purchases of any mortgage assets at the market price.
2) Raise more capital. Firms with significant financial exposure, which includes General Electric, have to raise money. We have seen capital raises recently from Morgan Stanley, Goldman Sachs, now General Electric, and we expect one shortly from Citigroup, probably tonight. There will be more, from regional banks and insurance companies.
GE stock is trading up about a dollar above where it was prior to the announcement. More importantly, GE credit spreads eased considerably. The cost of buying a credit default swap for five years on GE debt is now $495,000 to insure $10 million in debt; it was $680,000 to insure $10 b in debt prior to the announcement.
GE is the parent company of CNBC.
Bottom line: no one is arguing we are out of the woods, but we are taking baby steps toward there.
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