Why was it so desperate for cash? The company offers only the blandest reasons for its move, but investors were clearly worried that commercial paper was an important factor. Commercial paper is how corporations borrow for short periods, typically just a few days, for immediate purposes; it’s attractive because companies borrow only what they need, and interest rates are low. Lots of firms use commercial paper, frequently just for paying day-to-day bills, but no company uses it anything like GE. GE Capital alone has about $74 billion of commercial paper outstanding; the next largest player, J.P. Morgan, has about $47 billion. GE understood there was risk in relying so heavily on this source of funding but believed it was well prepared for any disruption through access to other sources, such as bank lines of credit.
On the morning of Oct. 1, the markets swirled with rumors that GE couldn’t roll over its commercial paper coming due. Like so much else that has happened in recent weeks, this possibility would have seemed outlandish just a month before; a spokesman insists the company has experienced no such problems. But in light of GE’s huge commercial paper obligations and the disruption of global credit markets, the rumors became just barely plausible. That’s when the stock suddenly dropped 10%, and the price of GE credit default swaps jumped. Regardless of how realistic the market’s fears were, the episode puts the Fed’s decision five days later to backstop the commercial paper market in a new light, as a signal of support for the commercial paper market’s biggest player.
The Ethereal Voice
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