For the second time this year, GE has laid bare GE Capital's books to assuage Wall Street's concerns about the finance unit's stability, and the results are of deep concern.

While the company works hard to calm investor nerves at yet another Wall Street meeting, there are a number of danger zones on GE Capital's balance sheet that GE is scrambling to fix.

GE has been the worst performer in the Dow Jones Industrial Average this year, due to its finance unit's serious problems. The industrial conglomerate now says it may need to inject $2 bn to $7 bn into GE Capital in 2011 to bolster its finances.

GE Stuns Wall Street--Again

Last week, GE shocked Wall Street once again with a nasty second quarter profit report. Earnings at GE Capital plummeted 80% in the second quarter, triggering a 47% plunge in GE's overall profits. GE now says GE Capital faces $34.4 bn in pretax losses and impairments over the next two years under the worst case scenarios under the government's stress tests. 

If GE spins off GE Capital (which it vows it won't), without the benefit of a deep-pocketed industrial parent and the extraordinary generosity of the US taxpayer, there are deep GEconcerns that GE Capital might go under, analysts on Wall Street fear.

GE's Non-bank Bank

Which is why GE has successfully pressured the government to let it use all sorts of taxpayer bailout programs, even though GE Capital is ostensibly not a bank, and is instead a charter member of the shadow banking system, where it sells bank products unregulated by the government.

If it were a bank, GE Capital would be the seventh largest in the country in terms of assets, just behind Morgan Stanley.  A member of the Dow since 1896, GE Capital was launched in 1932 to help finance its parent's industrial operations. GE chief executive Jeffrey Immelt now sits on the Obama administration's economic advisory board.

While the US government has helped GE, it has refused to come to the help of GE Capital's competitor CIT Group, leaving this small business finance company to scramble to get private funding to shore up its severely damaged balance sheet.

Earlier this year, the Obama administration said it would seek to do away with a notably weak bank regulator, the Office of Thrift Supervision, which also fell down on the job overseeing the troubled insurer AIG (AIG owns thrifts as well, putting it in the OTS's purview). That raises the question whether GE Capital might be subject to more intense reviews by another government body--the Federal Reserve, since GE Capital uses Fed bailout programs.

Administration Growing Uneasy

The thinking behind the abolishment of the OTS was, the Administration was growing increasingly uneasy with non-banks like GE using a backdoor into taxpayer bailout programs since companies have purchased what are called 'industrial loan companies,' usually based in Utah, which do loan and credit card processing as well as other backroom banking operations. The Administration, the thinking is, instead wanted to force these companies to either focus on commerce or banking, but not both, triggering speculation GE would have to spin off GE Capital.

Immelt Sticks to His Guns

GE chief executive Immelt has said GE has no intention of doing that, and today the company is sticking to that party line.  

obama1"GE is and will remain committed to GE Capital, and we like our strategy," Immelt has already said in a memo to staffers. The company again has reiterated that GE Capital would be profitable this year, with an estimated $5 bn in earnings, down from $7.1 bn last year and half the $10.3 bn it posted in 2007.

Some $270 bn has been torched, immolated out of GE's market capitalization since 2008, and GE's shares hit a 17-year low earlier this year.

Short-term Obsession = Long-Term Problems

Obsessed with short-term profit goals, GE let its finance unit dangerously bulk up on all sorts of bad assets during the bubble years, including commercial real estate, $230 bn or so (GE is one of the world's largest commercial lenders), as well as $183 bn in consumer finance assets (including private label credit cards), and all sort of other assets coming from distressed markets such as the UK and Eastern Europe, assets which now sit like anvils on GE Capital's balance sheet.

GE Struggles to Downsize GE Capital

GE first shocked Wall Street in April 2008 when it missed its earnings estimates by a country mile, with the finance unit's losses in tow. Ever since, GE has been racing to pare down GE Capital's $635.5 bn balance sheet to $400 bn. GE chief executive Immelt has also been steadily jawboning lower the company's profit targets,  and vows to cut GE Capital's profit share of the parent's earnings down to 30% from 55% in 2007.

The market itself is helping Immelt keep to that promise.

GE Capital Not Earning Its Keep

GE Capital earns its keep by exploiting the spread between the cost of debt it issues and the loans and finance contracts it writes, making it highly vulnerable to a credit market meltdown.

In other words, GE Capital relies on short-term borrowings for its funding needs, so when the credit markets collapsed last fall, GE was staring into the abyss. GE Capital has about $81 bn in long-term debt maturing by the end of 2009, and of that, $43 bn came due June 30.

How GE Maneuvered--Fast

Last fall, after AIG, Lehman Bros., Wachovia and Washington Mutual collapsed, after Freddie Mac and Fannie Mae were taken into government conservatorship, GE and its coterie of lawyers descended on Washington to get banking regulators to let GE and its sick finance unit in the door in the taxpayer bailout programs. GE did so by delivering a tortured reading of a 1991 law enacted after the S&L crisis.

The law had to do with stopping "systemic risk" and although GE does not own a bank, it instead owns two small thrifts. Though the thrifts represent just 3% of its overall assets, GE rammed itself through this giant loophole hooked wider by its lawyers.

Things got even worse earlier this year when GE lost its coveted Triple-A rating, which lets it borrow dirt cheap in the credit markets. It also slashed its dividend for the first time since 1938, a dividend tantamount to an annuity, analysts have noted. GE then raced to use taxpayer bailout programs.

GE's Government Loopholes

So GE won access to the FDIC debt guarantee program, nearly 40%, it's estimated, of which represent backstops for GE Capital. GE gets to insure a maximum $126 bn of its debt through this program--already GE is the single biggest corporate user of this FDIC debt insurance. The program lets GE borrow dirt-cheap in the credit markets to fund its operations. GE vows it will soon exit this program.

If companies can't take this ocean of water onto their balance sheets when this FDIC insurance expires 2012, then the FDIC, meaning, the US taxpayer must. Already, the FDIC has  Congress Bernankeinsured an estimated $340 bn in this program, which it plans to end by October.

GE also accesses the Federal Reserve's commercial paper backstop, a maximum $98 bn there. And its footnote disclosures show it may access the Fed's TALF program, whereby it gets government help for its securitizations of tens of billions of dollars worth of all sorts of assets on its balance sheet, with another $55 bn or so now sitting warehoused in Enron-style off balance sheet vehicles.

However, GE Capital is not subject to the Fed's stress tests, nor is it subject to the Fed's rules for limiting risk, nor is it subject to government limits on executive compensation.

Ugly Profit Forecast

And while it says it will be profitable this year, GE Capital though has stress tested its balance sheet, and the results were ugly. As noted, it said it faces $34.4 bn in pretax losses and impairments over the next two years, using the worst case scenarios in the government's stress tests.

GE Capital's Perilous Balance Sheet

A look at its balance sheet should also trigger serious concern. GE has $572.8 bn in liabilities and $635.5 bn in assets teetering atop a razor-thin $32.9 bn in tangible common equity, its net worth on a hard assets basis, after you strip out ephemera like goodwill (the payment made above book value in acquisitions) or intangibles, like, say, the value of the brains of its spreadsheet jockeys.

To some analysts on Wall Street, GE Capital appears levered up like any run of the mill, overextended hedge fund.

Paying the Piper

And here's one of its most glaring, fire-engine red flags: GE Capital also has $203.2 bn borrowings coming due in the next four years, about two-thirds of the company's total debt.

Can GE refinance that debt without the taxpayers' help?