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Piling on Samuelson
Like Tyler, I think Samuelson has not done his homework.
Here is Paul Samuelson:
But financial panic engendered by the burst bubble of unsound U.S. and foreign mortgage lending means that even a mammoth corporation like General Electric would find it expensive now to finance a loan needed to build a new and efficient factory.
Here is Jeffrey Immelt, chairman and chief executive of General Electric:
Q: What's your opinion of the "credit squeeze" and the view that the US economy may be about to run into difficulties?
A: It's clear there has been some bad lending behaviour [by banks] in the US. But in the world as a whole, there is still a lot of liquidity. Companies generally have strong balance sheets, giving them the ability to borrow on reasonable terms....If you consider the problems in the credit markets, they will not have an impact on the vast majority of GE's business. In other words, the overall effect on GE will be limited.
Yes, Immelt's job is to be rosy but profits are strong at GE. I'd like to see some evidence for Samuelson's statement.
Posted by Alex Tabarrok on November 19, 2007 at 06:05 PM in Economics | Permalink
Comments
Look at what GE's stock did throughout the credit crunch. It had a negative correlation to the market. Why? Listen to GE's conference call if you have the time....
http://www.ge.com/investors/events/event_id10122007.html
Two key paraphrases from the conference call.
1) During the financial meltdown people were running to us to buy our CP, and it lowered our short term cost of debt(or kept it from rising anyway).
2) We will NOT have to write down a significant amount of our real estate portfolio. Why? Because we underwrite to hold, not to flip. So we make sure they are good investments.
Posted by: Jay at Nov 19, 2007 9:53:20 PM
Yeah, but what would General Electric know about finance?
;)
Also notable along this line is that Goldman Sachs is having a very profitable year. So, some people saw the train coming and got off the tracks.
Posted by: zbicyclist at Nov 19, 2007 10:30:08 PM
He merely says "General Electric would find it expensive now finance a loan". Not impossible or even difficult, just more expensive. In a credit crunch where liquidity has dried up, borrowing money is presumably more expensive than it used to be, even for a company with a solid credit rating. The need to offer a higher interest rate for bonds might even make certain projects uneconomical to pursue.
He's not claiming that GE is in financial trouble of any kind, so mentioning GE's profits is beside the point.
Posted by: at Nov 19, 2007 10:33:08 PM
Echoing the previous commenter, Prof. Samuelson's statement would be less powerful but more correct if he simply said "more expensive" instead of "expensive". From the vantage point of debt spreads, GE's borrowing is indeed expensive. Today's 10Y Treasury rate is 4.25%, while AAA 10Y borrowers must pay 5.32% (see http://www.bloomberg.com/markets/rates/). A debt spread of over 100bp for a triple-A credit is historically high. However, in absolute terms, 5.32% is far from the highest 10Y rate that we've seen over, say, the past 30 years.
But of course debt cost is just one factor in the capital investment decision. The amount of implied equity and its cost, the volatility of returns from "the factory", the opportunity cost of the second-best alternative, are but a few elements that may have recently moved unfavorably and made it more difficult for projects to pass the hurdle.
Posted by: Steve Yuen at Nov 19, 2007 11:26:22 PM
Samuelson has a point.
First of all, half of GE is a finance company, or GE is half finance, so it's likely
experiencing at least some of the liquidity and credit issues that other, more purer,
lending insitutions are.
Secondly, remember when, famously, a certain bond investor (I think it was Bill Gross)
basically said 'no mas' to GE's commercial paper program? Liquidity dired up in about
a day. It was really pretty drastic for GE then. Even though GE is AAA rated, it's so
big and it's financing demands are so great, that just doing normal business with it
could create a larger than desirable credit risk.
Posted by: glenn at Nov 20, 2007 1:31:14 AM
Alex, your argument lacks force as well! How does "GE's profits are strong" disprove the fact that it might still face a liquidity crunch? And, why don't u take a stand! Do u think the sub-prime crises is good or justified?
Posted by: Raul at Nov 20, 2007 3:24:03 AM
The fact that GE's profits are strong is a reason why it is not having any trouble borrowing. It is also highly relevant to Samuelson's underlying argument that the subprime crisis is spreading far and wide. See also Tyler's commentary.
Posted by: Alex Tabarrok at Nov 20, 2007 8:04:02 AM
Alex, I'm not having any trouble buying gasoline. I just find it expensive, nowadays. Why are you conflating two different things here?
Posted by: at Nov 20, 2007 9:00:39 AM
Do you mean that Don Geiss is not actually president of GE? My world is shattered.
Posted by: d.cous. at Nov 20, 2007 10:11:40 AM
"not...the highest rate...over, say the last thirty years"
Yes, thirty years, just enough to include that 1980 Volcker Crunch.
Posted by: lee at Nov 20, 2007 10:17:36 AM
His last statement is also nonsense coming from an economist. I guess he'd want an MRI on an ingrown toenail.
Posted by: dave smith at Nov 20, 2007 10:25:26 AM
Lee, when I said "in absolute terms, 5.32% is far from the highest 10Y rate that we've seen over, say, the past 30 years" I was not trying to be cute with the measurement starting point. If you go to Federal Reserve statistical releases (www.federalreserve.gov), specifically report H.15, you will see that the 10Y Treasury hit 6.5% in 2000 and was above 8% in 1990. AAA credits' rates would be higher, of course.
Posted by: Steve Yuen at Nov 20, 2007 10:54:56 AM
One of the first metrics you should look at when assesing a bond risk premium to a company is times interest earned.
Posted by: Jay at Nov 20, 2007 12:23:26 PM
Steve Yuen was right. A data point on General Electric: last week they sold 10-year bonds at 140 bp over Treasuries, a very high spread. However, because 10-year Treasuries have such a low yield right now (due to flight to safety during the credit crisis), it is 60 bp cheaper in absolute terms than a similar bond offering done last year.
Posted by: at Dec 8, 2007 12:37:39 AM
Posted by: 翻译公司 at Feb 25, 2008 8:58:01 AM
Posted by: Alii at Apr 3, 2008 9:06:09 PM
