How a Loophole Benefits GE in Bank Rescue

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Industrial Giant Becomes Top Recipient in Debt-Guarantee Program

Jeff Gerth and Brady Dennis
June 29, 2009 - The Washington Post and ProPublica

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General Electric, the world's largest industrial company, has quietly become the biggest beneficiary of one of the government's key rescue programs for banks.

At the same time, GE has avoided many of the restrictions facing other financial giants getting help from the government.

The company did not initially qualify for the program, under which the government sought to unfreeze credit markets by guaranteeing debt sold by banking firms. But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE.

As a result, GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government's actions have been "powerful and helpful" to the company, GE chief executive Jeffrey Immelt acknowledged in December.

GE's finance arm is not classified as a bank. Rather, it worked its way into the rescue program by owning two relatively small Utah banking institutions, illustrating how the loopholes in the U.S. regulatory system are manifest in the government's historic intervention in the financial crisis.

The Obama administration now wants to close such loopholes as it works to overhaul the financial system. The plan would reaffirm and strengthen the wall between banking and commerce, forcing companies like GE to essentially choose one or the other.

"We'd like to regulate companies according to what they do, rather than what they call themselves or how they charter themselves," said Andrew Williams, a Treasury spokesman.

GE's ability to live in the best of both worlds -- capitalizing on the federal safety net while avoiding more rigorous regulation -- existed well before last year's crisis, because of its unusual corporate structure.

Banking companies are regulated by the Federal Reserve and not allowed to engage in commerce, but federal law has allowed a small number of commercial companies to engage in banking under the lighter hand of the Office of Thrift Supervision. GE falls in the latter group because of its ownership of a Utah savings and loan.

Unlike other major lenders participating in the debt guarantee program, including Bank of America, Citigroup and J.P. Morgan Chase, GE has never been subject to the Fed's stress tests or its rules for limiting risk. Also unlike firms that have received bailout money in the Troubled Assets Relief Program, or TARP, GE is not subject to restrictions such as limits on executive compensation.

The debt guarantee program that GE joined is administered by the Federal Deposit Insurance Corp., which was reluctant to take on the new mission, according to current and former officials who were not authorized to speak publicly. The FDIC also initially resisted expanding the pool of eligible companies, fearing it would add more risk to the program, the officials said.

Despite those misgivings, there have been no defaults in the loan guarantee program. It has helped buoy confidence in the credit markets and enabled vital financial firms to raise cash even during the darkest days of the economic crisis. In addition, the program has raised more than $8 billion in fees.

"The TGLP program has been a moneymaker for us," FDIC chairman Sheila C. Bair has said. "So I think there have been some benefits to the government and the FDIC."

For its part, GE said that it properly applied for and qualified for the program. "We were accepted on the merits of our application," company spokesman Russell Wilkerson said.
The Cash Cow

The current good fortune of General Electric, ranked by Forbes as the world's largest company, has roots in the Great Depression, when it created a consumer finance arm so that cash-starved families could buy its appliances.

What grew from those beginnings is now a powerful engine of profit, accounting for nearly half of its parent's net earnings in the past five years. GE may be better known for light bulbs and home appliances, but GE Capital is one of the world's largest and most diverse financial operations, lending money for commercial real estate, aircraft leasing and credit cards for stores such as Wal-Mart. If GE Capital were classified as a banking company, it would be the nation's seventh largest.

Unlike the banking giants, GE Capital is part of an industrial company. That allows GE to offer attractive financing to those who buy its products.

At the height of last fall's financial crisis, GE's cash cow became a potential liability. As credit markets froze, analysts feared that GE Capital was vulnerable to losing access to cheap funding -- largely commercial paper, or short-term corporate IOUs sold to large investors.

Company officials projected confidence. "While GE Capital is not immune from the current environment," Immelt said in October, "we continued to outperform our financial-services peers." Behind the scenes, they urgently sought a helping hand for GE Capital. One key hope was a rescue plan taking shape at the FDIC.

The program emerged during a hectic weekend last October as regulators scrambled to announce a series of rescue efforts before the markets opened.

They found a legal basis for the program in a 1991 law: If a faltering bank posed "systemic risk," then the FDIC, the Fed, the Treasury secretary and the president could agree to give the FDIC more authority to rescue a failing institution. The financial regulators applied the statute broadly, so it would cover the more than 8,000 banks in the FDIC system.

The FDIC hurried to approve the program Oct. 13.

"This was crisis management on steroids," said a person familiar with the process. "A lot was made up on the fly."

The author of the systemic-risk provision, Richard Carnell, now a law professor at Fordham University, says it was intended to apply to a single institution, and that in their rush to find legal footing for unprecedented new programs, regulators "turned the statute on its head."

The FDIC launched the program Tuesday, Oct. 14, the same day Treasury officials announced large capital infusions into nine of the country's banking giants under TARP. That day, the FDIC also expanded its deposit guarantees to a broader range of accounts.

Within days, the FDIC held conference calls with bankers to explain the program. Agency officials explained that not all companies that owned banks were eligible. "The idea is not to extend this guarantee to commercial firms," David Barr, an FDIC spokesman, said during one of the calls.
A Broader Program

GE was watching closely. Though GE Capital owned an FDIC-insured savings and loan and an industrial loan company, they accounted for only 3 percent of GE's assets. Company officials concluded that GE couldn't meet the program's eligibility requirements.

So the company requested that the program "be broadened," GE's Wilkerson said. GE's main argument was fairness: The FDIC was trying to encourage lending, and GE Capital was one of the country's largest business lenders.

GE deployed a team of executives and outside attorneys, including Rodgin Cohen, a banking expert with the New York firm Sullivan & Cromwell.

"GE was among the parties that discussed this with the FDIC," along with the Treasury and Fed, according to FDIC spokesman Andrew Gray. He said the details about eligibility "had not been specifically addressed" in the beginning.

Citigroup, the troubled banking giant, also was pressing for an expansion of the FDIC program. Though Citigroup was included in the debt guarantee program, its main finance arm, Citigroup Funding, appeared ineligible. Fed Vice Chairman Donald L. Kohn wrote to the FDIC's Bair on Oct. 21, arguing that debt issued by Citigroup Funding should be covered "as if it were issued directly by Citigroup, Inc."

Two days later, the FDIC announced a new category of eligible applicants -- "affiliates" of an FDIC-insured institution. Bair explained that "there may be circumstances where the program should be extended" to keep credit markets flowing. That meant "certain otherwise ineligible holding companies or affiliates that issue debt" could apply, she said.

GE Capital now was eligible.

Raising Billions

GE Capital won approval to enter the FDIC program in mid-November with support from its regulator, the Office of Thrift Supervision. The company used the government guarantee to raise about $35 billion by the end of 2008. By the end of the first quarter of 2009, the total reached $74 billion, helping to cover the company's 2009 funding needs and about $8 billion of its projected needs for 2010.

Despite government support, GE lost its Triple-A rating for the first time in decades this year and was forced to sharply cut its dividend. But the outlook could have been much worse.

The debt guarantee program has "been of critical importance" to the fiscal health of GE Capital, said Scott Sprinzen, who evaluates GE's finance arm for the Standard & Poor's credit-rating company. He said the FDIC program enabled GE to "avoid an exorbitant price" for its debt late last year.

GE has not disclosed how much the company has saved because of TLGP backing.

Like other companies in the program, GE pays the FDIC fees to use the guarantees -- a little more than $1 billion so far. But as Bair explained to bankers last fall, the fees, while "healthy," are "far below certainly what the cost of credit protection is now in the market."

Not every finance company has had that peace of mind. One of GE's competitors in business lending markets, CIT Group, a smaller company, has had a harder time raising cash. It has been unable to persuade the FDIC to allow it into the debt-guarantee program, at least in part because of its lower credit ratings. A recent Standard & Poor's analysis cited CIT's "inability to access TLGP" as a factor in the company's declining financial condition.
The 'Cliff' Ahead

Two weeks ago, the Obama administration said it would seek to eliminate the Office of Thrift Supervision and force companies like GE to focus on commerce or banking, but not both. That could require the industrial giant to spin off GE Capital.

Last week, Immelt said GE had no intention of doing that. "GE is and will remain committed to GE Capital, and we like our strategy," he said in a memo to staff.

In its proposal to overhaul financial regulation, the Treasury Department pointed out that some firms operating under the existing rules, including collapsed companies such as American International Group, "generally were able to evade effective consolidated supervision and the long-standing policy of separating banking from commerce."

GE's Wilkerson said the company generally supports regulatory reform but thinks that it should be permitted to retain its structure. "Bank reform has historically included grandfathering provisions upon which investors have relied," he said, "and there is no reason this settled principle should not be followed here." He said the company "didn't have any choice" but to have OTS as its regulator.

The company also objects to the Treasury's proposal to force firms to separate banking and commerce because that issue "had nothing to do with the financial crisis," Wilkerson said.

Wilkerson said GE has remained profitable and avoided some of the exotic financial products that contributed to losses at other institutions. He also said that GE performed an internal stress test this year and found that its capital position was "quite strong by comparison to the banks."

The FDIC has been working to wean financial institutions off the program. The TLGP originally was slated to end in June, but at the Treasury's request the FDIC agreed to extend it until Oct. 31. Some participants have stopped using the program, but GE Capital continues to do so for the overwhelming majority of its debt.

Much of the $340 billion in debt will come due in 2012, the year the FDIC guarantees expire. At that point, known in banking circles as the "cliff," the agency will have to make good if companies such as GE are unable to honor their obligations. FDIC officials say they are comfortable that the agency has collected more than enough money to cover potential losses.

Iraqi Whose Lies Made the Case for War Looks on from Afar

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Martin Chulove
June 29, 2009 - The Guardian/UK

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When the Iraqi who could be considered more responsible than any other for the US invasion six years ago quietly returned last March to the land his lies helped shape, Iraq was entering one of its most stable and promising phases in six years of turmoil

Rafid Ahmed Alwan - otherwise known as Curveball - slipped back into Baghdad after 10 years of exile in Germany.

Before the invasion, Curveball had become the CIA's most valuable source on Iraq's fictitious chemical and biological weapons programme, a man who underscored the White House's push for war through a litany of lies that later claimed the careers of the former secretary of state Colin Powell, and CIA chief George Tenet.

Both were forced to admit they had gone to war partly on the word of a collaborator whom no American agency had even debriefed until one year after Baghdad fell.

Curveball was a trained chemical engineer, who had been taken straight from university to work in a division of Saddam Hussein's intelligence services, known as division four, which dealt with the former dictator's pet projects. That much was true. But he also harboured illusions of grandeur; a life in a new land with riches, unveiled women and a new Mercedes.

The Baghdad he returned to in March must have seemed almost unrecognisable. Curveball stayed with a nephew in Baghdad's north-east who he told he was planning to return for good from Germany, which has continued to offer him sanctuary.

The plump 42-year-old saw none of his old friends or colleagues during his visit; nor did he bother the alumni of Baghdad University of Technology - a campus still reeling from the conduct of its former student.

"Are you here to talk about uncle coming back again?" his nephew asked expectantly last week, believing the Guardian was facilitating Curveball's travel. "He hasn't been gone long and we are expecting him soon."

Had he gone near his old workplace, the Saad State Company for Housing and Construction, Curveball would have found his former colleague Dr Abdul Salam Jeber at his desk. He agreed to talk for the first time about his three months in CIA custody, which he now knows were caused by Curveball, a man he barely knew, but never trusted.

Two months after Baghdad fell, Jeber was approached by his boss who told him a group of Americans wanted to meet him. At the time, the American military was scanning Iraq intensively, looking for proof of a chemical and biological weapons programme. They were building their case on the word of Iraqi collaborators who had filled in the dots when United Nations weapons inspectors could not.

There were about six high value informants, used by the US and Britain, none more so than Curveball.

As the ultimately fruitless search intensified, Curveball remained under the protection of his German handlers, who drip-fed reports to the CIA throughout the lead-up to the invasion and the increasingly desperate months that followed.

Their man was sticking to his story. He had provided highly detailed and technically specific information about several facilities around Iraq that apparently masqueraded as agricultural plants. Jeber worked at one of them, the al-Hakem plant, south-west of Baghdad.

"They were expecting to find information about fermentation projects for bacterial weapons. I was the chief of the fermentation section of the company at the time," he said. "I know exactly what all the facilities were used for and there was no dual purpose for any of them.

"The Americans interrogating me didn't understand that if a project like that was to be started, a minimum of 200 people would know about it; there would be technical reports, chemical process designs, mechanical design, installation, then operation. Any one of the 800 employees in Saad Company may well have known about it."

Jeber was moved around Iraq from American-run prisons at Baghdad airport, to Camp Bucca near the Kuwaiti border, desert tents nearby, Abu Ghraib, and a small room in one of Saddam Hussein's over-run palaces. He estimates he was interrogated at least 50 times - always the same questions.

He was blindfolded and sleep-deprived for days then enticed with fruits and family visits. It was a classic counter-espionage routine designed to break defences that didn't exist.

"They said I had signed an agreement not to disclose information to foreigners, which is totally true. We all had to do that," he said.

"I now know that the 15 July date they kept talking about was a date in which Rafid had told them about an important moment in the so-called dual purpose facility. They also asked me about the three tucks that he talked about."

Jeber was given $1,000 and released in September 2003. Within eight months Tenet and Powell had resigned. He is, however, satisfied at a serendipitous achievement that he lays at Curveball's feet. "It was very important to get rid of Saddam," he said. "I never expected he would be removed from Iraq.

Should Curveball return, he faces a highly uncertain future in Iraq. Ba'athist militias still see him as an enemy. His friends seem to have largely disowned him and his family has scattered to the four winds. The wife he abandoned when he fled to Germany will have nothing to do with him. Tracked down at her home in Baghdad, she sighed and, holding her three-year-old son said: "My life with him was lie after lie after lie."

Betraying the Planet

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Paul Krugman
June 28, 2009 - The New York Times

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So the House passed the Waxman-Markey climate-change bill. In political terms, it was a remarkable achievement.

But 212 representatives voted no. A handful of these no votes came from representatives who considered the bill too weak, but most rejected the bill because they rejected the whole notion that we have to do something about greenhouse gases.

And as I watched the deniers make their arguments, I couldn't help thinking that I was watching a form of treason — treason against the planet.

To fully appreciate the irresponsibility and immorality of climate-change denial, you need to know about the grim turn taken by the latest climate research.

The fact is that the planet is changing faster than even pessimists expected: ice caps are shrinking, arid zones spreading, at a terrifying rate. And according to a number of recent studies, catastrophe — a rise in temperature so large as to be almost unthinkable — can no longer be considered a mere possibility. It is, instead, the most likely outcome if we continue along our present course.

Thus researchers at M.I.T., who were previously predicting a temperature rise of a little more than 4 degrees by the end of this century, are now predicting a rise of more than 9 degrees. Why? Global greenhouse gas emissions are rising faster than expected; some mitigating factors, like absorption of carbon dioxide by the oceans, are turning out to be weaker than hoped; and there's growing evidence that climate change is self-reinforcing — that, for example, rising temperatures will cause some arctic tundra to defrost, releasing even more carbon dioxide into the atmosphere.

Temperature increases on the scale predicted by the M.I.T. researchers and others would create huge disruptions in our lives and our economy. As a recent authoritative U.S. government report points out, by the end of this century New Hampshire may well have the climate of North Carolina today, Illinois may have the climate of East Texas, and across the country extreme, deadly heat waves — the kind that traditionally occur only once in a generation — may become annual or biannual events.

In other words, we're facing a clear and present danger to our way of life, perhaps even to civilization itself. How can anyone justify failing to act?

Well, sometimes even the most authoritative analyses get things wrong. And if dissenting opinion-makers and politicians based their dissent on hard work and hard thinking — if they had carefully studied the issue, consulted with experts and concluded that the overwhelming scientific consensus was misguided — they could at least claim to be acting responsibly.

But if you watched the debate on Friday, you didn't see people who've thought hard about a crucial issue, and are trying to do the right thing. What you saw, instead, were people who show no sign of being interested in the truth. They don't like the political and policy implications of climate change, so they've decided not to believe in it — and they'll grab any argument, no matter how disreputable, that feeds their denial.

Indeed, if there was a defining moment in Friday's debate, it was the declaration by Representative Paul Broun of Georgia that climate change is nothing but a "hoax" that has been "perpetrated out of the scientific community." I'd call this a crazy conspiracy theory, but doing so would actually be unfair to crazy conspiracy theorists. After all, to believe that global warming is a hoax you have to believe in a vast cabal consisting of thousands of scientists — a cabal so powerful that it has managed to create false records on everything from global temperatures to Arctic sea ice.

Yet Mr. Broun's declaration was met with applause.

Given this contempt for hard science, I'm almost reluctant to mention the deniers' dishonesty on matters economic. But in addition to rejecting climate science, the opponents of the climate bill made a point of misrepresenting the results of studies of the bill's economic impact, which all suggest that the cost will be relatively low.

Still, is it fair to call climate denial a form of treason? Isn't it politics as usual?

Yes, it is — and that's why it's unforgivable.

Do you remember the days when Bush administration officials claimed that terrorism posed an "existential threat" to America, a threat in whose face normal rules no longer applied? That was hyperbole — but the existential threat from climate change is all too real.

Yet the deniers are choosing, willfully, to ignore that threat, placing future generations of Americans in grave danger, simply because it's in their political interest to pretend that there's nothing to worry about. If that's not betrayal, I don't know what is.