John Burbank of Passport Capital appeared at the Value Investing Congress this morning. I'm getting inured to scary prognoses at this point, but he managed to scare me by saying that GE, which is having difficulty rolling over its paper, and which has 22 times as many assets as it has tangible equity, is "at great, great risk of going bankrupt".
"The global capital markets system has had a heart attack," said Burbank, "and the policymakers are prescribing exercise and vitamins." If they really want to unblock things, they'll need to try something much more drastic: Burbank was talking about amounts as large as $5 trillion which could be injected into the system today, and taken out only when it was no longer needed.
Burbank also said that the US should aggressively devalue the dollar: the upspike in the dollar and concomitant downturn in oil prices, he said, has hurt hedge funds badly, just as they were coming to the end of their quarter and were allowing redemptions. The redemptions will cause panic selling, and indeed that might be what we're seeing this morning.
I'm not sure that it's either feasible or desirable for the government to attempt a $5 trillion bailout. And competitive devaluations don't help anybody. But I do think that GE, in particular, with more than $500 billion in debt, is at great risk in a credit crunch of today's proportions. It's outperforming the market today, but if you think it's a safe haven, think again.
As for what the government should do, a couple of correspondents have written to me this morning asking whether discount window funds from central banks could come with strings attached: essentially forcing some percentage of those funds to be onlent in the interbank market. Is that possible? Would it be useful, in terms of restarting interbank lending? It's a genuine question: I really don't know.
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