GE (GE) is raising $15 billion, some of it from Warren Buffett at usurious rates. In many states his actions would have been illegal.

Why does GE need the money? No so long ago its CEO Jeff Immelt described the conglomerate’s financial operations as "boring", an indication that all was well. GE cut its forecasts for the third quarter and the full year, but it only cut them a little bit.

At the end of its second quarter, GE had $60 billion of cash and securities on its balance sheet. It also had more than $550 billion in short-term and long-term borrowing. By taking Buffett’s money and raising more cash through the sale of common stock, GE made the tacit admission that something was wrong with all of that borrowed money and that what was recently described as "boring" actually became sinister.

It would be harsh to say that GE management cannot be trusted or that they cannot see beyond the next corner. A more likely explanation for the firm’s predicament is that it was swamped by frozen credit and bad debts like most companies and banks that hold large capital assets and liabilities on their balance sheets.

Now that both Goldman Sachs (GS) and GE have raised billions of dollars, it opens the question of how many other US operations will need large cash infusions. Goldman and GE are the gold standards in the financial and industrial worlds. If they took Buffett’s money at shameless rates of interest, what will become of less well-heeled corporations.

The awful answer is that borrowing by corporate America may come at a remarkably steep price. The rates Buffett got are junk bond rates. They are the kind of paper that Michael Milken used to get, before his unfortunate run-in with the authorities.

The burden of debt at most companies is about to get much worse. What is 10% for GE is likely to be 12% or 13% at many other perfectly good businesses. It is what the market for cash is asking and, when firms need capital, it is the rate the the market will get.

Overnight, the need for capital at even well-run and liquid operations has become a junk bond economy. High interest always mean higher default rates. The next few quarters will be worse than they look today.

Douglas A. McIntyre

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