How GE Can Save Itself ?

GE has some problems.  It's capital has a lot of asset ($600 billion) and some of them are going to default.  People are anticipating the problem and have already punished the shares and the debt for these potential problems.

GE has another problem.  People are selling.  No one is buying.  Prices are collapsing.  This is destroying confidence in GE, setting the stage for higher capital costs, and if the losses are sufficiently high, raising questions of solvency.

GE has an easy and interesting way to correct the imbalance between supply and demand of its debt, improve its balance sheet, book a nice profit if they start taking the capital market theorists at face value.  More specifically, the market value of GE debt has plunged.  On a M2M basis, this improves GE's capital position, via the arithmetic identity that equity = assets - liabilities.  If the liabilities decline, equity goes up -- dollar for dollar.

I am suggesting that GE use its liquidity to buy back any and all debt that is selling close to 50 cents on the dollar.  Buy $2 of debt for $1 and the capital position improves by $1.  This is identical to simply adding to capital and magically reducing debt by the same amount.  Here is an example of some exchange traded debt.  This move saves them $2 billion.

Is it realistic?  Maybe.  I am just scratching the surface with some GE Capital exchange traded debt.  They have billions more.

Could they buy it up in the market?  They could buy some, but most likely the price of the debt will rise.  However, this would help restore confidence in GE.

If you want, think of it as GE selling credit default swaps on its own debt.  Only they wouldn't be messing around in the world of derivatives, but in the real market for the underlying.  

As far as technical details, they would need some sort of dispensation from the Treasury and SEC to just start buying.  In addition, the rating agencies would need to recognize this as unequivocally positive -- which it would be.

People should get their head around the fact that either GE's debt is mispriced OR GE's market based capital is much, much stronger then it appears.  

Argue that a GE purchase would just increase the price of the debt means that the market price isn't an accurate estimate of its value.  The markets are shallow and erratic.  A little buying and the price soars.

Or it means that GE can actually realize billions of dollars of market based capital by just buying underpriced debt.  

It can't be both.  Logically impossible.