Once it invented the lightbulb, General Electric Co. (NYSE: GE) spent the better part of the next 105 years expanding everywhere into consumer and industrial electronics. If it had an 'ON' switch, chances are GE made it.
That's how the company became a solid investment. In fact, on Wall Street, GE was known as a "widows and orphans" stock – completely safe for regular investors to buy and hold. It was the bluest of the blue chips – a decent dividend-payer and a stock to pass on to your grandchildren.
The company continued to diversify into content creation and distribution, software, pharmaceuticals, healthcare, and even capital.
And then, in 2008, the company imploded – spectacularly. It was that capital division that did it in the end.
GE Capital was very nearly fatal to the company. The king of American industry had to go begging for emergency funding of $74 billion to cover its financing needs. Millions of hitherto confident shareholders got slaughtered and watched the stock drop from a high of $42 down to $5.73.
What's happened since is something every investor needs to know, whether you're considering picking up GE shares, selling them, or hanging onto them…
How GE Got into the Money Business (and Nearly Died There)
GE initially ventured into consumer finance during the Great Depression to facilitate sales of its appliances.
The company's zest for growth and genius for meeting unfulfilled customer needs soon sent the capital business skyrocketing. Why not help customers buy your own products – especially when you collect the interest?
For decades, a veritable army of capital-related businesses financed purchases of nearly everything GE made, from consumer products like their "Daylite" black and white televisions to commercial products like their GEnx turbofans for Boeing 747 jet airliners.
GE's Capital businesses did everything from issuing "white label" credit cards and providing mortgage money to financing the company's energy and capital markets trading operations.
By 2008, more than half of the company's $18 billion earnings that year were derived from its GE Capital-related businesses.
Things were getting "complicated"…
Technically, although the company owned only two small banks, which combined accounted for less than 3% of the company's assets, by 2008, GE was the nation's seventh-largest bank in terms of loan assets, putting it between Morgan Stanley and U.S. Bancorp.
And while GE Capital wasn't an FDIC-insured, Federal Reserve-regulated bank, in terms of "assets" it had in fact become the nation's largest "shadow bank."
Instead of relying on a huge deposit base, GE Capital's businesses financed loans and capital markets operations by issuing short-term commercial paper, which it constantly had to roll over. Because GE itself naturally sported a AAA rating, GE Capital's cost of money, or the interest it paid on its commercial paper and other borrowing facilities, was advantageously low, allowing it to grow and compete toe-to-toe with big banks and finance companies.
When the commercial paper market and other short-term funding sources came to a standstill in the autumn of 2008, GE very suddenly couldn't finance its ongoing capital, consumer or commercial loan, leasing, or lending businesses.
Because of its two small banks, GE turned to the FDIC for help. With a few twists and turns of existing banking regulations, GE got access to FDIC backing, which allowed the Federal Reserve to facilitate its capital needs.
The company's escape was a very near thing. While the company survived – barely – its future was uncertain.
GE's Daring Bid for Survival Hinged on Two Things
Its future as a viable concern, let alone a desirable stock, depended on the answers to two big questions:
- Would it continue its risky (but profitable) de facto banking operations in capital markets and consumer and commercial credit?
- Would it shed its industrial operations to raise much-needed cash?
The company went another way – and here's where it gets interesting.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.