Sinking Strategies

by Guinandra Jatikusumo

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Earlier in class my professor said something that’s been sitting in my mind while I review my notes for my risk management exam tomorrow. He said: “Sometimes, when you’re drowning, keep drowning. Don’t look for ropes and branches to pull you out of water.” He was referring to a strategy once employed by the financial strategists of General Electric (G.E.) prior to and after President Obama’s rescue stimulus given to the firm. In times when the firm suffered from losses (or intentionally sought losses?), G.E. took advantage of the U.S.’ tax credit laws to generate positive cash flows. Although irrelevant to this particular discussion, here’s a representative paragraph on G.E.’ accounting strategies quoted from The New York Times:

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

G.E. generated positive cash flows from the U.S.’ I.R.S. tax credits under circumstances in which profits weren’t in the firm’s favor. The maintenance of positive cash flows for a certain time period, holding other relevant variables constant, increased the firm’s asset values. With G.E.’s impressive business model and human resources, the firm can then switch gears to the conventional profit-seeking strategies whenever it deems optimal.  So when you’re sinking, the most intuitive solution might be getting out of the lake as soon as possible. But it doesn’t imply optimality. Sometimes you just need to hold your breath a little bit longer and simply enjoy the aquatic scenery surrounding you.

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