Ethics discussion: Bonds

When corporations issue bonds, the buyers of those bonds (the investors) should try to determine the impact of the bond issuance on the expected earnings of the corporation.

General Electric Capital, a division of General Electric, uses long-term debt extensively. In early 2002, GE Capital issued $11 billion in long-term debt to investors, then within days filed legal documents to prepare for another $50 billion long-term debt issue. As a result of the $50 billion filing, the price of the initial $11 billion offering declined (due to higher risk of more debt).
Bill Gross, a manager of a bond investment fund, “denounced a ‘lack in candor’ related to GE’s recent debt deal. ‘It was the most recent and most egregious example of how bondholders are mistreated.’ Gross argued that GE was not forthright when GE Capital recently issued $11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as $50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit and promissory notes at some future date.”

In your opinion, did GE Capital act unethically by selling $11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another $50 billion debt offering?

Source: Jennifer Ablan, “Gross Shakes the Bond Market; GE Calms It, a Bit,” Barron’s, March 25, 2002.

My Response:



It is true from CNNMoney that the 11 billion in bonds that were issued in 2002, CNNMoney states, “GE Capital sold $11 billion in global bonds Wednesday, the second-biggest U.S. issue ever as the company sought to lock in low financing costs before the economy recovers.” (http://money.cnn.com/2002/03/13/news/companies/ge-bonds/index.htm)

This article interestingly goes on to say that who else but WorldCom was the other company that has beat out GE is bond issues just a few months prior issuing 11.9 billion in bonds. Now is that not interesting, WorldCom.Not only did they then sell the 50 billion 3 month later, they had sold 3.5 billion in notes just one month before and on the heels of that released a expanded annual report, “It also comes five days after GE released an expanded annual report to soothe investors who have been jittery about sprawling companies with complicated accounting, such as Enron Corp. (ENE: Research, Estimates) and Tyco International Ltd.” (http://money.cnn.com/2002/03/13/news/companies/ge-bonds/index.htm).

Given the quote by CNN and the Quote in the ethics question by Bill Gross, there was a great deal of speculation about this deal. I also feel that from the quote in the CNN article that Yes, GE was very much aware of the “jitters” of there investors especially due to Enron, and Tyco international. So why would they make such a bold step 3 months later when ethics were being so scrutinized at that time.Even American Express Asset Management team had something to say about all of this, “But not everyone was cheered by the news. Tim Doubek, a portfolio manager at American Express Asset Management in Minneapolis, said the bonds could only hurt investors if negative news persists about accounting, corporate earnings and management.” (http://money.cnn.com/2002/03/13/news/companies/ge-bonds/index.htm)

In that GE could make this decision to sell another 50 billion on the heels of the 11 billion, they like some of the big corporations these days added fuel to the fire of public trust yet again! How unfortunate and unethical! What is it going to take to get all this type of behavior to stop? Look at the mess our economy is in at the present. How low do we have to go I ask?

(http://money.cnn.com/2002/03/13/news/companies/ge-bonds/index.htm), retrieved October 11, 2008,