GE Holds Investor Conference Tomorrow to Give Some Clarity on Their Real Estate Portfolio and Overall Business

Clarity awaits you

Investors in General Electric Co. will get a more detailed picture of what the world’s largest landlord holds in its commercial real-estate portfolio when GE’s finance arm updates investors on its businesses and financials Thursday.

But the disclosure mightn’t ease doubts about whether the Fairfield, Conn., conglomerate is owning up to the potential losses it faces from those investments.

Other companies have been clobbered by steep declines in the value of office buildings, apartments, stores, hotels and other commercial property. The Dow Jones REIT index has slid 60% in the past 12 months. Private-equity firms that specialize in real estate are reporting losses of as much as 60% for funds invested recently.

GE has been much more generous in its approach to its holdings. So far, GE has said its $34 billion in property could fall in value by about 1.5% this year, amounting to a pretax loss of as much as $500 million.

When values were rising, real estate used to be a major earnings machine for GE’s finance arm. By selling a few buildings, the company could immediately recognize profits. But, with the sales market at a virtual standstill, profits are plummeting and the risk of losses is increasing.

A GE spokesman declined to answer questions about the company’s real-estate portfolio, citing plans to make an “in-depth public presentation” Thursday. But in the past GE executives have said that, under accounting rules, the company doesn’t have to “mark to market” its real-estate holdings as other investors do. In other words, the company doesn’t have to value its properties at what they would be worth if they were sold today.

Why? GE says because properties are long-term investments, the company should book losses in terms of potential drops in cash flows and their expected long-term decline in value. Also, about 80% of its real-estate holdings were purchased with cash and have no mortgages. That means that, unlike other highly leveraged property investors, GE runs very little risk of having to sell properties to pay off creditors.

But many on Wall Street believe GE’s approach doesn’t sufficiently recognize the damage the recession is doing to commercial real estate, which is expected to get steadily worse. Last week, GE lost the triple-A credit rating it first achieved more than five decades ago, as Standard & Poor’s lowered its view on GE’s long-term debt by one notch, to double-A-plus. The bond-rating firm cited, among other concerns, GE’s “large exposure” to commercial real estate in light of “mounting strains” in this sector.

Moreover, GE may still be too optimistic even using its more-conservative approach for estimating losses, analysts say. Looking at cash flow and long-term declines in value, the company’s portfolio may lose a lot more than $500 million, they say.

“If commercial real-estate prices are down between 20% and 30% from the peak, it’s not too hard to see that the downside could be a lot more than $500 million,” said analyst Richard Hofmann at CreditSights.

Cash flow is a big problem right now for landlords, including GE, because vacancies are rising and rents are falling at nearly unprecedented rates.

Nationwide, as job losses accelerated, vacancies at office towers increased 0.8 percentage point to 14.5% in the fourth quarter, the largest one-quarter jump since the second quarter of 2001, and likely will rise to 16.7% this year, according to research firm Reis Inc. in New York.

Office and retail leases can run for as many as 15 years, meaning that landlords that sign deals today are locking in lower rents — and lower values — for the long term.

Also, GE’s portfolio is vulnerable to steeper losses partly because the company bought so much at the top of the market. According to Real Capital Analytics, a research firm in New York, GE sold $7 billion of real estate world-wide in 2007 but acquired $16.6 billion that frothy year.

Some of GE’s 2007 deals appear to be turkeys. For example, in July 2007, GE bought nine office complexes in Chicago from Blackstone Group LP for $1.05 billion. Those properties had been owned by Equity Office Properties, which Blackstone acquired for $39 billion at the beginning of 2007 and then sold off in large chunks. Vacancy is rising at most of those properties, according to real estate firms.

At Oakbrook Terrace Tower, a prominent 31-story building that is close to the finest shopping and restaurants in suburban Chicago, the vacancy rate has jumped to 33% today from about 16% at the time GE bought the property, according to CoStar Group Inc.

Overall, vacancies at the Equity Office properties acquired by GE have risen to more than 25% from 19%, according to the real-estate research firm in Bethesda, Md.

In the Chicago market, almost half of the office buildings showed rent declines in the fourth quarter.

“We have never seen this kind of marked acceleration in the number of office properties willing to lower rents to prevent further deterioration in occupancy,” says Reis research director Victor Calanog.

In his annual letter to shareholders, GE Chief Executive Jeffrey Immelt offered a frank view on the company’s real-estate holdings: “Today, I wish we had less exposure to commercial real estate.”

Since this is taxpayer money how about taxpayers getting a piece

(Reuters) – Some of the billions of dollars the U.S. government paid to bail out American International Group Inc stand to benefit hedge funds that bet on a falling housing market, the Wall Street Journal said, citing people familiar with the matter and reviewed documents.

The documents showed how Wall Street banks were middlemen in trades with hedge funds and AIG that left the insurer holding the bag on billions of dollars of assets tied to souring mortgages, the paper said.

AIG has put in escrow some money for at least one major bank, Deutsche Bank AG, whose hedge fund clients bet against the housing market, the paper said, citing a person familiar with the matter.

The money will be released to the bank if mortgage defaults rise above a certain level, it said.

Investment banks such as Goldman Sachs Group Inc and Deutsche Bank sold financial instruments to hedge funds letting them bet that mortgage defaults would rise, the paper said, adding that the instruments were credit default swaps — a form of insurance that pays out in the event of a debt default.

From mid-September to the end of last year, AIG and the government paid $5.4 billion to Deutsche and $8.1 billion to Goldman under credit default swap contracts the insurer had written, the paper said.

It is not known which hedge funds made those bets with specific banks, the paper said, adding several large funds made big, ultimately profitable, wagers that mortgage defaults would increase.

An AIG spokeswoman declined to comment to the paper.

A spokesman for Deutsche Bank told the paper that the bank’s “exposure to AIG was well-collateralized and hedged.”

A Goldman spokesman also told the paper that the firm’s exposure was collateralized and hedged.

AIG, Deutsche Bank and Goldman Sachs could not be immediately reached for comment by Reuters.

AIG, an embattled insurance giant that has received federal bailouts totaling $173 billion and is now paying $165 million in employee bonuses, is at the heart of a global financial crisis that U.S. President Barack Obama is trying to address with plans for trillions of dollars in spending.

Perhaps the World Bank was behind the curve on their estimates

BEIJING (AP) – The World Bank cut its forecast of China’s 2009 growth from 7.5 percent to 6.5 percent on Wednesday due to plunging exports but expressed confidence in Beijing’s ability to keep the world’s third-largest economy expanding amid global turmoil.

The drop in trade will hurt investment and job creation, the bank said in a quarterly report. But it said China still should grow faster than other major countries due to its huge stimulus package and strong banks, which were unhurt by the global crisis.

“China is hit very hard by an external shock,” Louis Kuijs, the bank’s senior China economist and the report’s main author, said at a news conference. Kuijs said that also could push down prices, which can force companies to cut wages and investment.

Premier Wen Jiabao said last week China should meet its official 8 percent growth target despite a 25.7 percent drop in exports in February. Forecasts by private sector economists range from 8 percent to as low as 5 percent – the strongest of any major country but a sharp drop from 2007’s stunning 13 percent expansion.

Wen said Beijing is ready to expand its 4 trillion yuan ($586 billion) stimulus if the downturn’s impact downturn worsens, though he gave no details.

Beijing still has “plenty of space to implement forceful stimulus measures,” with more spending and interest rate cuts, the World Bank report said.

“We see China as a relative bright spot in a rather gloomy global economic picture,” said David Dollar, the bank’s country director for China.

The stimulus is intended to reduce reliance on trade by pumping up domestic consumption through spending on building highways and other public works. But retail sales growth is weakening, suggesting Beijing has yet to spur a rebound in private sector spending. Kuijs said government outlays alone cannot fill the gap left by falling exports.

The World Bank says it estimates each percentage point less growth in China’s non-agricultural gross domestic product growth means 5.4 million fewer jobs. There are no comprehensive data on China’s employment or job losses but the government says the crisis has thrown some 20 million migrant laborers out of work.

Wednesday was the second time in four months the Washington-based World Bank has cut its China growth forecast for 2009, following a reduction in November from 9.2 percent to 7.5 percent. Growth at 6.5 percent would be the weakest since 1990’s 3.8 percent and below the 7.6 percent reported in 1999.

“We don’t foresee any significant recovery in China’s growth until the world economy recovers,” Kuijs said. Dollar said the global economy is expected to shrink by 1.5 percent this year, with no recovery until late in the year or in 2010.

“We should eventually see some recovery in exports later in the year, but on the whole the prospects remain pretty somber,” Kuijs said.

Some economists say China must grow by a minimum of 8 percent annually to produce enough jobs for millions of new workers each year. The World Bank has said, however, that there is no specific growth rate required to keep employment stable.

Communist leaders worry that job losses could fuel unrest and are promising to spend to create employment. They are promising more spending on health, education and other social programs to reduce the financial burden on Chinese families and encourage them to divert money to spending on consumer goods.

Kuijs said that if Beijing decides it needs another stimulus, it might be more effective if it focuses on social programs, job creation and household consumption, instead of more construction. He said that also might save Beijing money.

“There are limits to how much money you can spend usefully on investment-oriented spending,” he said. “It may make just as much sense not to go for the second or third general fiscal stimulus but to do more in these areas such as using the social safety net to deal with the negative consequences of this crisis on people’s livelihood and unemployment.”

Consumer prices fell in February, raising the risk of deflation, but Kuijs said that was not a serious threat yet and Chinese policymakers have tools to fight it.

Everybody is waiting on the cabal cartel today

SHANGHAI (AP) – Most Asian and European markets rose modestly Wednesday after an overnight surge on Wall Street, while Tokyo shares were buoyed by fresh support for the wobbly financial system from the Japanese central bank.

Hong Kong’s Hang Seng index led the region, gaining 239.08 points, or 1.9 percent, to 13,091.03, while Tokyo’s benchmark Nikkei 225 stock average added 23.04 points, or 0.3 percent, to 7,972.17.

The Japanese central bank said it was increasing its purchase of government bonds to keep ample cash in the monetary system following a two-day meeting where it also decided to keep its key interest rate at 0.1 percent. The Bank of Japan also said it was considering providing loans to commercial banks as way to shore up their capital bases.

“Investors took heart from the bank’s moves. The Bank of Japan is not sitting still. It is taking action aggressively to ensure the smooth liquidity in the financial market,” said Masatoshi Sato, a strategist at Mizuho Investors Securities Co. Ltd.

South Korea’s Kospi rose 0.5 percent to 1,169.95, while Shanghai’s benchmark Composite Index added 0.2 percent to 2,223.73.

Australia’s benchmark S&P/ASX 200 dipped 0.2 percent after miner Rio Tinto dropped 8.7 percent on worries over its deal with Aluminum Corp. of China.

In Europe, Britain’s FTSE 100 dipped 0.1 percent, while Germany’s DAX rose 1.2 percent and France’s CAC 40 advanced 0.8 percent.

Wall Street got a surprise boost Tuesday, posting its fifth gain in six trading sessions, from a government report that home construction picked up in February. The news, which was unexpected, injected new vitality into a week-old rally.

Asian markets also have advanced strongly in recent sessions on signs of improvement among major U.S. and European banks. But many analysts are cautious and believe the rally has run its course for now.

“The rebound has almost reached its limit,” said Castor Pang, an analyst at Sun Hung Kai Financial in Hang Seng, noting that turnover in most markets is not rising quickly enough to suggest a recovery.

Mainland China’s advance faltered toward the middle of the day, although higher commodity prices pushed up shares of metal and coal companies. Major steel maker Baoshan Iron & Steel gained 0.9 percent and Jiangxi Copper Ltd. soared 5.5 percent. But major banks fell back, with Bank of China slipping 0.8 percent and Shanghai Pudong Development Bank falling 1.3 percent.

The World Bank cut its forecast of China’s 2009 growth from 7.5 percent to 6.5 percent due to plunging exports. But World Bank economists expressed confidence in Beijing’s ability to keep the world’s third-largest economy expanding amid global turmoil.

“We see China as a relative bright spot in a rather gloomy global economic picture,” said David Dollar, the bank’s country director for China.

As the market closed, Japanese electronics company Toshiba Corp. said it was naming a new president in a management reorganization aiming at dealing with Japan’s crippling recession. The company’s stock rose 0.4 percent.

In New York Tuesday, the Dow Jones industrial average jumped 179 points, or 2.5 percent, to 7,395.70. The Standard & Poor’s 500 index climbed more than 3 percent.

U.S. stock index futures were down, pointing to a lower open on Wall Street Wednesday. Dow futures were down 32 points, or 0.4 percent, while S&P 500 futures were down 4 points, or 0.5 percent.

Oil prices fell in Asian trading, with benchmark crude for April delivery falling 39 cents to $48.77 a barrel by midday in Singapore on the New York Mercantile Exchange.

In currencies, the dollar fell to 98.56 yen from 98.79 yen late Monday in New York, while the euro rose to $1.3040 from $1.3031.

Australian government reviews were extended

Shares in Rio Tinto plunged almost 9 per cent in Australia last night amid growing opposition to the planned $19.5 billion deal with Chinalco, the Chinese state-owned metals group.

The fall, which saw the stock close at $47.50, followed renewed efforts by critics of the deal to stir up opposition to it. Their campaign has been fuelled by the decision by Australian authorities to extend its review of the tie-up.

Advertisements on Australian television last night by a politician declared: “Keep Australia Australian.”

And in a note, Goldman Sachs JBWere said there appeared to be a growing risk the deal would collapse. “As much as we don’t like the Chinalco deal, if it is not approved now and without an attractive alternative, we would see this as negative for the share price.”

An independent senator, Nick Xenophon, said: “I think we should be selling the milk, not the cow and in this case, the minerals, not the mine.”

Rio last month announced plans to raise $12.3 billion by selling stakes in a number of mining assets to Chinalco and a further $7.2 billion by issuing a convertible bond to the Chinese company.

The deal is aimed at helping to ease its $39 billion debt mountain.

However, some top shareholders are furious that the group did not give them right of first refusal before offering a large part of its equity to a third party.

The tie-up has also met with opposition on political grounds, with claims that Australia’s “source of wealth” is being bought by a foreign Government.

On Monday, Australia’s Foreign Investment Review Board announced an extension of its review of the controversial deal untiil June. The delay will prevent Rio holding a shareholder vote on the deal until mid-June at the earliest.

Rio yesterday appointed Jan du Plessis, chairman of British American Tobacco, as its new chairman. It will now deploy him to sell the controversial tie-up to investors and persuade them that it is in their interest.

Jim Leng, deputy chairman of Tata Steel, had been lined up to replace the retiring chairman, Paul Skinner, but he quit last month amid concern about the Chinalco deal.

Rio has warned that 2,000 Australian jobs could be at risk if the Chinalco deal does not receive regulatory approval.

When will you object to interest attached to printed money ?

March 18 (Bloomberg) — Federal Reserve policy makers will likely determine today that the U.S. recession is still deepening, while clashing on what to do about it.

Officials will debate how to provide further stimulus to the economy, from purchasing more mortgage bonds to buying Treasury securities. They’ll also keep the benchmark interest rate as low as zero percent, according to all 71 forecasters in a Bloomberg News survey.

At least three of the 17 top Fed officials want to buy Treasuries or target the supply of money, while Chairman Ben S. Bernanke has favored reviving specific credit markets. Central banks worldwide are grappling with how to set policy when rates are near zero; the Bank of England started buying government debt this month, and the Bank of Japan said today it would increase its purchases of sovereign bonds.

“There are big philosophical differences” among Fed policy makers, said Ethan Harris, co-head of economic research at Barclays Capital Inc. “Bernanke is on the very activist side, believing in active, aggressive policies. There are others who think policies should be much more limited, with minimal disruption in the operations of the free market.”

The Fed’s Open Market Committee is scheduled to issue its statement around 2:15 p.m. today in Washington.

The Fed staff, in preparation for the FOMC meeting, probably downgraded its economic forecasts from the prior meeting on Jan. 28, when policy makers predicted unemployment would peak in the fourth quarter as low as 8.5 percent.

Bernanke Warned

Bernanke warned last week the jobless rate may rise beyond 10 percent. His comment underscores the need for the Fed to step up purchases of assets and begin reversing the $400 billion contraction in its balance sheet since December, analysts said.

According to the “Taylor Rule” devised by Stanford University Professor John Taylor suggesting how a central bank should set interest rates if inflation or growth veer from goals, the need for stimulus would justify cuts in the federal funds rate by the end of 2009 to minus 7.5 percent, Laurence Meyer, vice chairman of Macroeconomic Advisers, said in a note to clients. Such a move is logistically impossible.

“We know we need more stimulus,” said Stanford University economist Robert Hall, who heads the National Bureau of Economic Research’s committee that dates the start and end of U.S. recessions. The Fed would “stimulate spending” by expanding its purchases of privately sold assets like housing agency securities, he said. “So we should push in this direction until we get the economy moving again.”

The FOMC statement may highlight the increased risks to the economy following the loss of 651,000 jobs in February, bringing the total since the recession began to 4.4 million.

‘Downside Risks’

“There will be downward revision in growth and an increase in the downside risks,” said Mark Gertler, a New York University economist and research co-author with Bernanke. “The wording will be expand the balance sheet as necessary to moderate credit conditions. They will suggest they will be very aggressive.”

Policy makers have disagreed on just how to be more aggressive. They have at least three options: increase the $1 trillion Term Asset-Backed Securities Loan Facility aimed at restoring consumer and business lending; expand purchases of mortgage-backed securities and agency securities; or begin purchasing long-term Treasuries.

Third Option

The argument for the third option gained ground with “the success the Bank of England has had in lowering long-term rates” by purchasing U.K. government bonds known as gilts in a program announced this month, said Lyle Gramley, a former Fed governor.

The 10-year gilt yield slid to the lowest level in at least 20 years after the Bank of England started buying gilts in a “quantitative easing.” The policy is intended to reduce interest rates and help pull the economy from its first recession in 17 years.

In Japan, 10-year bonds yields fell to the lowest in more than a week after the central bank said it would increase its monthly purchases of government debt to 1.8 trillion yen ($18.3 billion) from 1.4 trillion yen now.

Richmond Fed Bank President Jeffrey Lacker and Philadelphia Fed President Charles Plosser have urged the Fed to preserve neutrality and leave credit programs to the U.S. Treasury Department. Lacker dissented at the FOMC meeting in January, preferring to expand the balance sheet with purchases of Treasury securities.

Monetary Base

St. Louis Fed President James Bullard said in a Feb. 17 speech that policy makers should avert deflation by increasing the monetary base, the total money in circulation plus reserve deposits at central banks. He distinguished between such efforts and the Fed’s emergency programs expanding liquidity.

Bernanke, Vice Chairman Donald Kohn and a majority of the FOMC have said some help to markets for consumer and auto loans and other credit markets is essential for reviving investor demand.

The so-called TALF “should still provide substantial support to auto loans, and therefore to help the customers of the auto companies to be able to purchase vehicles,” Bernanke said Feb. 25 to the House Financial Services Committee.

That program is off to a slow start. Last week, the Fed delayed by two days until tomorrow the deadline for submissions of proposed packages of debt that investors can buy with Fed financing. Brokers and investors have had difficulty agreeing over contract terms, according to participants in the preparations.

That could leave increased purchases of mortgage-backed securities as an attractive option, said Robert Mellman, an economist at JPMorgan Securities Inc. in New York.