GE Capital Retreat – NYTimes.com

“wholesale funding.” is industry parlance for borrowing in the markets, as opposed to raising money from deposits. Borrowing for short periods in the markets is tempting because it can be a cheaper source of funding for lenders than issuing longer-term debt. Lenders take the cheap, short-term money and lend it for higher rates to companies and individuals.

As profitable as that strategy might be for certain periods, it can be precarious. In the 2008 tumult, investors who lent in that short-term market fled, leaving the financial firms that borrowed there without funding. It was a version of an old-fashioned bank run.  GE Capital had short-term borrowings that were equivalent to nearly a third of its assets going into the crisis. That left it in a position where it had to rely on the government. It was a humbling moment for a company that had a triple-A credit rating at the time.“

G.E.’s decision today shows that some of the financial reform measures regulators have taken are working,” Dennis Kelleher, the president of Better Markets, a group that has often asserted that the overhaul is inadequate, said in a statement. “Firms that threaten America’s financial system — like Wall Street’s too-big-to-fail banks — have to be made to bear the costs of their risky business so taxpayers don’t have to pay the bill when their risks explode like in 2008.”

via The Lessons for Finance in the GE Capital Retreat – NYTimes.com.


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