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What does it mean that they would have been bankrupt? I thought (wrongly perhaps) that you were only bankrupt if you couldn't pay your bills. So no matter their

What does it mean that they would have been bankrupt? I thought (wrongly perhaps) that you were only bankrupt if you couldn't pay your bills. So no matter their true debt back then, doesn't GE's current existence prove they weren't bankrupt?

lotsofpulp 12y ago
I think what mickeyouse means is that if the taxpayers didn't step in to subsidize all the financial institutions, then GE would have bee bankrupt (just like most other financial institutions).
mikeyouse 12y ago
If your assets are worth less than your liabilities, you're technically insolvent. If you can still pay your bills from cashflows, you don't need to claim bankruptcy, but on a long enough timeline without a significant change, you will go bankrupt. There was a long stretch of time post-GFC where this was the case with GE. Banks have to 'mark-to-market' their debt periodically, but since GE wasn't a bank, they didn't abide by the same regulations. Say there were two identical houses on a street with $500k mortgages, but the market crashed, the houses are worth less, and only 1/2 of the mortgages will be repaid. If Bank of America owned the first house, the mortgage asset (it's an asset to the bank) would be marked-to-market and what was formerly a $500k asset would now be worth $250k, and the bank would show a loss of $250k. GE doesn't have to do this and could carry assets at their previous value (and didn't have to mark down bad debt either). To simplify the story, during the GFC, GE had that one mortgage "worth" $500k and debts worth $400k. If they were a bank, they would have had to admit that the mortgage was really worth $250k, and they would've gone into receivership. If not for that accounting quirk and the massive amount of bailout cash they took from the Federal Reserve / FDIC, they would have actually had to declare bankruptcy. Ironically enough, the FDIC program and Federal Reserve are to shore up banks and GE was explicitly not a bank per the above few paragraphs. So make sense of how they got access to bailout money solely authorized to bail out banks.. [1] - $45B in losses buried on GE's balance sheet: http://www.businessinsider.com/henry-blodget-living-on-planet-ge-2009-4 http://www.businessinsider.com/henry-blodget-living-on-plane... [2] - GE borrowed $16B from Federal Reserve: http://www.propublica.org/article/general-electric-tapped-fed-to-borrow-16-billion http://www.propublica.org/article/general-electric-tapped-fe... [3] - FDIC to back $139B in GE Capital Debt: http://dealbook.nytimes.com/2008/11/12/fdic-to-back-139-billion-in-ge-capital-debt/?_php=true&_type=blogs&_r=0 http://dealbook.nytimes.com/2008/11/12/fdic-to-back-139-bill... [4] - GE Borrows $59.3B from FDIC program: http://www.bloomberg.com/news/2010-12-01/ge-borrowed-16-billion-in-commercial-paper-plan-fed-data-show.html http://www.bloomberg.com/news/2010-12-01/ge-borrowed-16-bill...
- r00fus 12y ago
  Also to note: our megabanks would also likely be forced into restructuring (it's probably a bad idea for a bank to go bankrupt) if they also had to "mark to market" with the same strictness as before. Instead of restructuring, the Fed and FASB decided to blow more bubbles in 2009: http://www.marketwatch.com/story/fasb-approves-more-mark-market-flexibility http://www.marketwatch.com/story/fasb-approves-more-mark-mar...
- clarky07 12y ago
  > If your assets are worth less than your liabilities, you're technically insolvent. No you aren't. It just means you have a negative net worth. insolvent - unable to pay debts owed. Think of people instead of companies. I suspect a majority of people in America have a negative net worth. That doesn't make them insolvent. It just means they have lots of college loans and they are working to pay them back.
  - barrkel 12y ago
    http://www.investopedia.com/terms/a/accounting_insolvency.asp http://www.investopedia.com/terms/a/accounting_insolvency.as... A situation where the value of a company's liabilities exceeds its assets. Accounting insolvency looks only at the firm's balance sheet, deeming a company "insolvent on the books" when its net worth appears negative.
    - clarky07 12y ago
      you added an adjective to the term :-) Yes you can call them insolvent if you want to, but it doesn't mean anything if they can still pay their debts. If the number keeps going down it is certainly a problem, but if it heading back up it is fine. The housing crisis is a perfect example of this. It only became a problem for people who bought more house than they could afford with hopes of selling at a moments notice. My house was as much as 50k underwater (going based on foreclosure sales of identical townhouses) during the crisis. Fortunately, I didn't buy more house than I could afford. I could easily continue to pay my mortgage each month and was never anywhere near bankrupt. I sold the house recently for closer to 10k loss. Was I insolvent when the house was down 50k? No. [1]Cash flow insolvency involves a lack of liquidity to pay debts as they fall due. Balance sheet insolvency involves having negative net assets—where liabilities exceed assets. Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency. [1] http://en.wikipedia.org/wiki/Insolvency http://en.wikipedia.org/wiki/Insolvency

lotsofpulp 12y ago

I think what mickeyouse means is that if the taxpayers didn't step in to subsidize all the financial institutions, then GE would have bee bankrupt (just like most other financial institutions).

mikeyouse 12y ago

If your assets are worth less than your liabilities, you're technically insolvent. If you can still pay your bills from cashflows, you don't need to claim bankruptcy, but on a long enough timeline without a significant change, you will go bankrupt. There was a long stretch of time post-GFC where this was the case with GE. Banks have to 'mark-to-market' their debt periodically, but since GE wasn't a bank, they didn't abide by the same regulations. Say there were two identical houses on a street with $500k mortgages, but the market crashed, the houses are worth less, and only 1/2 of the mortgages will be repaid. If Bank of America owned the first house, the mortgage asset (it's an asset to the bank) would be marked-to-market and what was formerly a $500k asset would now be worth $250k, and the bank would show a loss of $250k. GE doesn't have to do this and could carry assets at their previous value (and didn't have to mark down bad debt either). To simplify the story, during the GFC, GE had that one mortgage "worth" $500k and debts worth $400k. If they were a bank, they would have had to admit that the mortgage was really worth $250k, and they would've gone into receivership. If not for that accounting quirk and the massive amount of bailout cash they took from the Federal Reserve / FDIC, they would have actually had to declare bankruptcy. Ironically enough, the FDIC program and Federal Reserve are to shore up banks and GE was explicitly not a bank per the above few paragraphs. So make sense of how they got access to bailout money solely authorized to bail out banks.. [1] - $45B in losses buried on GE's balance sheet: http://www.businessinsider.com/henry-blodget-living-on-planet-ge-2009-4 http://www.businessinsider.com/henry-blodget-living-on-plane... [2] - GE borrowed $16B from Federal Reserve: http://www.propublica.org/article/general-electric-tapped-fed-to-borrow-16-billion http://www.propublica.org/article/general-electric-tapped-fe... [3] - FDIC to back $139B in GE Capital Debt: http://dealbook.nytimes.com/2008/11/12/fdic-to-back-139-billion-in-ge-capital-debt/?_php=true&_type=blogs&_r=0 http://dealbook.nytimes.com/2008/11/12/fdic-to-back-139-bill... [4] - GE Borrows $59.3B from FDIC program: http://www.bloomberg.com/news/2010-12-01/ge-borrowed-16-billion-in-commercial-paper-plan-fed-data-show.html http://www.bloomberg.com/news/2010-12-01/ge-borrowed-16-bill...

r00fus 12y ago
Also to note: our megabanks would also likely be forced into restructuring (it's probably a bad idea for a bank to go bankrupt) if they also had to "mark to market" with the same strictness as before. Instead of restructuring, the Fed and FASB decided to blow more bubbles in 2009: http://www.marketwatch.com/story/fasb-approves-more-mark-market-flexibility http://www.marketwatch.com/story/fasb-approves-more-mark-mar...
clarky07 12y ago
> If your assets are worth less than your liabilities, you're technically insolvent. No you aren't. It just means you have a negative net worth. insolvent - unable to pay debts owed. Think of people instead of companies. I suspect a majority of people in America have a negative net worth. That doesn't make them insolvent. It just means they have lots of college loans and they are working to pay them back.
- barrkel 12y ago
  http://www.investopedia.com/terms/a/accounting_insolvency.asp http://www.investopedia.com/terms/a/accounting_insolvency.as... A situation where the value of a company's liabilities exceeds its assets. Accounting insolvency looks only at the firm's balance sheet, deeming a company "insolvent on the books" when its net worth appears negative.
  - clarky07 12y ago
    you added an adjective to the term :-) Yes you can call them insolvent if you want to, but it doesn't mean anything if they can still pay their debts. If the number keeps going down it is certainly a problem, but if it heading back up it is fine. The housing crisis is a perfect example of this. It only became a problem for people who bought more house than they could afford with hopes of selling at a moments notice. My house was as much as 50k underwater (going based on foreclosure sales of identical townhouses) during the crisis. Fortunately, I didn't buy more house than I could afford. I could easily continue to pay my mortgage each month and was never anywhere near bankrupt. I sold the house recently for closer to 10k loss. Was I insolvent when the house was down 50k? No. [1]Cash flow insolvency involves a lack of liquidity to pay debts as they fall due. Balance sheet insolvency involves having negative net assets—where liabilities exceed assets. Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency. [1] http://en.wikipedia.org/wiki/Insolvency http://en.wikipedia.org/wiki/Insolvency