General Electric Co shares fell as much as 16 percent on Wednesday, touching their lowest point since 1991, as anxiety over a possible downgrade for GE and its finance unit was compounded by an investor lawsuit over a recent dividend cut.

The cost of insuring GE Capital's debt hit a record high on fears over the unit and new data released showed the percentage of GE shares held short reached an all-time high on February 20.

GE shares recovered somewhat after the conglomerate said it had acted aggressively to adapt to the current recession and had no plans to raise additional equity.

Losses eased further after a regulatory filing revealed GE Vice Chairman Michael Neal had bought 50,000 GE shares.

GE shares were down 21 cents or 3 percent at $6.80 on Wednesday afternoon on the New York Stock Exchange, after touching a low of $5.87.

People are playing the $2.50 options on this thing pretty heavily, said Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, which holds GE shares, referring to bets that the U.S. conglomerate's stock could fall to that level.

This looks like the same kind of bear rush that the financials got last summer. There's blood in the water and they're going to keep pounding away on this name.

Given GE's large retail shareholder base, some people holding the stock for its yield may now be selling, said Wayne Titche, co-manager of AHA diversified equity fund and chief investment officer of AMBS Investment, with holdings of 380,000 shares. Meanwhile, foreign investors appear to be unloading GE's debt in anticipation of the company losing its AAA-rating.

People are panicking because of the credit default swap spreads and because the yields are going up, and you have this perfect storm, Titche said.

Speaking on CNBC television, Bill Gross, co-chief investment officer of leading bond fund Pimco, attributed the sell-off to fears of a rating cut for GE and GE Capital.

The markets are beginning to anticipate a downgrade to double-A territory, Gross said.

DON'T PANIC

GE emailed investors to say in the unexpected event that GE Capital requires additional equity, we have a number of options to satisfy that need without seeking external capital.

Doug Ober, CEO of Adams Express Co in Baltimore, which owns 1.39 million shares of GE, said the battering the stock has taken is baffling, given that the company has demonstrated an ability to reduce their capital needs for GE capital.

This is a matter of investor confidence in the entire financial system, he said, and I don't fully grasp why GE has suffered the brunt of this as it has.

The cost of insuring GE Capital's debt against default with credit-default swaps earlier spiked to 20 percent upfront -- meaning an investor had to pay $2 million immediately plus $500,000 a year to insure $10 million of debt, according to data from Phoenix Partners Group. Later in the morning the upfront payment eased to $1.5 million.

DataExplorers, which tracks the number of shares out on loan to short-sellers and other investors, said as of February 20, 1.75 percent of GE shares were out on loan -- an all-time high. Its most recent data showed short-sellers -- who profit when share prices go down -- had been covering some of their positions. As of Wednesday, the company said its data showed only 1.33 percent of GE shares were out on loan -- still nearly double the 0.7 percent on January 1.

Fairfield, Connecticut-based GE cut the amount of its quarterly dividend by 68 percent on Friday. Investors are now focused on a possible downgrade to its triple-A credit rating from Moody's Investors Service or Standard & Poor's.

That dividend cut has prompted a shareholder lawsuit. A purported class-action case, filed in U.S. District Court in Manhattan by individual shareholder Karen Christiansen, accuses GE and top executives of deceiving the investing public about the future of its quarterly dividend payments.

GE shares have lost roughly 79 percent of their value over the past year, compared with a 45 percent drop for the Dow Jones industrial average <.DJI>.

(Additional reporting by Nick Zieminski, Dena Aubin, Emily Chasan, Deepa Seetharaman and Martha Graybow in New York; Editing by Gerald E. McCormick and Matthew Lewis)

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