Thursday, October 2, 2008

GE Raising Capital, Buffett Invests $3 Billion - U.S. Senate Passes Recovery Bill, Pelosi Pushes the "Buy-in"

On Wednesday, General Electric announced that it was going to raise a total of $15 billion in capital through stock sales. The big news though was that Warren Buffett was buying $3 billion of the GE stock through preferred shares with the option of $3 billion in common stock shares through warrants. In a statement, GE said it is looking to improve liquidity and give it the option of more acquisitions at a time of intense market turmoil. The sale gives GE more flexibility and would allow it to "play offense" in making acquisitions, GE CEO Jeff Immelt said in a statement.

The news helped to erase some of the day's slide in GE shares, which had fallen more than 9% prior to the news. Investors remained worried about the troubles at GE's finance arm, GE Capital, which has businesses ranging from loans to mid-sized business to investing in real estate.

"The economic environment remains volatile," said Immelt in a statement. "However, the company's performance remains on track with the earnings guidance we provided last week for 2008."

It was the second big strategic investment by Buffett's Berkshire Hathaway in the battered finance sector in as many weeks. Last week, Berkshire said it would invest $5 billion in Wall Street's Goldman Sachs. "GE is the symbol of American business to the world," Buffett, one of America's most famous investors, said in a statement. "I am confident that GE will continue to be successful in the years to come."

"This means that we are near the trough," said Campbell Harvey, professor of finance at Duke University, in Durham, North Carolina. "Some people will take it as a negative sign that GE is in trouble. I take it as a time when a very smart investor decides 'I am going to buy low, and this is it.'"

U.S. Senate Passes Recovery Bill

A bill to provide $700 billion to help rescue the ailing U.S. financial industry was passed 74-25 which was easily more than the minimum 60 votes needed for passage in the U.S. Senate.

The bill now goes to the House of Representatives, where a vote is likely on Friday.

The Senate's reworked bill adds on a handful of tax breaks for the middle-class and others, and provides more FDIC insurance to a maximum $250,000 per account instead of $100,000 for consumer bank deposits.

One of the tax breaks would extend a federal tax deduction for state and local sales taxes which has been very important in states with no income tax like Texas, Florida and Nevada.

Credit is starting to be an issue outside Wall Street as a spokesman for one lawmaker who voted "no" on Monday said the office was getting more phone calls from small businesses finding it harder to obtain loans in recent days which could influence the lawmaker's next vote.

House Speaker Nancy Pelosi has also been working. She is pointing out that if everything goes well with the plan, the legislation could end up making the government, and thus taxpayers, money. This is a "buy-in" not a bailout, she argues.

Sources: Yahoo, Reuters

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