By Porter Stansberry in the S&A Digest:

We've become slightly famous for accurately predicting the demise of several iconic America companies, including the original AT&T, GM, Fannie Mae, Freddie Mac, and (though it hasn't happened yet) Continental Airlines. We may have another business to add to the list: General Electric.

You may not realize it, but one of the largest drivers of profits at GE was its triple-A credit rating. The company's excellent credit allowed it to borrow money in the overnight commercial paper market for next to nothing and then use the money to buy all sorts of higher-yielding financial instruments - particularly credit-card receivables. This worked like magic and was the fuel behind the earnings management GE's CEO Jack Welch became famous for in the 1990s. (GE could always beat its earnings forecast because it would just use its financing arm to monkey around with the numbers until it came out the way it needed them too.)

GE, of course, wasn't the only company using the commercial paper market to fund all kinds of consumer-related borrowing. Tyco copied GE's business model and used its finance arm, known as CIT, to do the same thing. Once Tyco got in trouble for its phony earnings in the early 2000s, it decided to spin off CIT into a separate company. CIT is now poised on the brink of insolvency. And guess which company is following it down, almost tick for tick? Yep, GE.

 

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