Earlier this week, there was an article in the Washington Post outlining how GE outsmarted the system, because their failure would pose a “systemic risk” to the market if allowed to fail.”This was crisis management on steroids,” said a person familiar with the process. “A lot was made up on the fly.”
The upshot; the FDIC (also known as the US taxpayer) has guaranteed $340 billion of loans to companies like GE.Am I the only one who thinks when it comes to billions of dollars, we need a better solution than one assembled ‘on the fly’?
Basically, it sounds like GE Capital funded a large portion of its balance sheet in the commercial paper (CP) market.For you real estate guys, that’s like funding the purchase of real estate with a one day mortgage, every day… forever.That means every night you refinance with your current lender or find a new one.All that happened to companies like GE is they suddenly couldn’t refinance their debt.Sound familiar?Lucky for them, they just borrowed so much that there was a “systemic risk” to letting them suffer the consequences.
Beyond the obvious moral hazard of rewarding only the biggest borrowers with government funding, it’s just plain unfair.When all the CMBS debt starts to default in the coming months and years, why doesn’t the FDIC bail out the developers?Collectively, they borrowed more than GE and I’ll bet it will represent a “systemic risk”.It’s hard not to conclude that GE managed to procure an FDIC guarantee because they are politically powerful; and that landlords won’t because there aren’t many politicians seeking the ‘landlord vote’.
The current system of ‘on the fly’ regulation and crisis management needs to be replaced with clear statutory guidelines. We need to know who gets what, and when, BEFORE the next bubble cycle begins. Clarity will bring fairness and breed confidence. We need both now more than ever.