Yesterday, General Electric
Look out for the 3-scenario monte
Indeed, the $5 billion corresponds to GE's base scenario, which has unemployment peaking at 8.5% and US GDP declining by 1.8%. GE looked at two other cases based on the Fed's base and adverse scenarios for the U.S. economy, under which it estimates GE Capital would earn $2-$2.5 billion and zero, respectively. Unfortunately, there isn't much to separate GE's base scenario from the Fed's base case which is characterized by unemployment peaking at 9.3% and U.S. GDP dropping by 2%.
Even the Fed's adverse scenario (peak unemployment: 10.1%, U.S. GDP: (3.3%)) looks remarkably achievable. Investors who are focused on a single point estimate ($5 billion) in that context are setting themselves up to be disappointed – I think the likelihood that GE will achieve that number is almost zero.
Take commercial real estate, for example...
In its fourth quarter, Goldman Sachs
Unlike Goldman, Morgan Stanley
Who would you rather lend to: Turkey or GE Capital?
Either way, the credit default swap market took some comfort from GE's extra disclosure. The cost of insuring GE Capital's debt fell to 7.5% upfront yesterday (from 9% on Wednesday) and 5% annually (in order to insure $10 million of GE bonds against default over five years, one would need to pay $750,000 upfront and $500,000 annually).
In terms of the annual cost, that is a lot cheaper than that for insurers Metlife