Op-Ed: Could GE Collapse?
By
Minyanville Staff
Nov 17, 2008 11:05 am
Company's failure could trigger the mother of all bailouts.
General Electric (GE), that legendary American institution, is in deep trouble. It’s one of the few companies in the US that still retains its AAA rating - but, considering the rating agencies’ track record, that AAA isn’t worth the paper it’s written on.
The virtual crash in GE’s stock price indicates there’s something seriously wrong here. The stock reached $53 at its peak in 2000. It closed below $17 this past week, the lowest level since the mid-1990s. CEO Jeffrey Immelt, who took over from icon Jack Welch in 2001, has made his mark by managing the company into a 68% decline in stock price.
While shareholders have taken a bath, Mr. Immelt, a Harvard MBA, raked in $72.2 million of compensation between 2002 and 2007. A company known for its pay-for-performance mantra evidently doesn’t hold its CEO to the same standards.
The first cracks in this global institution appeared in April 2008. GE had met its earnings projections consistently for decades, and is widely known as a master of legal earnings manipulation. Accounting rules allow for wide discretion in reserves and estimates. GE Capital has always been a black box within the larger company. GE doesn’t provide detailed financial information about this division, which allowed GE to use this division as its backstop for meeting earnings estimates. During a better-than-expected quarter, they take extra reserves to meet estimates (or to beat them by a penny).
The GE Capital division would also sell liquid assets at quarter’s end to guarantee smooth sailing. This earnings management had lulled analysts and stockholders into complacency.
In mid-March, Mr. Immelt publicly confirmed that GE would meet earnings expectations of $0.50 to $0.53 per share for the quarter ending March 31st. When GE reported earnings of $0.44 per share in early April, the world was shocked. The stock, which had reached a yearly high of $37, dropped 16%, to $31. Knowing that GE always has excess reserves to manage their earnings made the magnitude of the miss literally incredible.
Former CEO Jack Welch went on CNBC and said, “I’d be shocked beyond belief, and I’d get a gun out and shoot him if he doesn’t make what he promised now. Here’s the screw-up: you made a promise that you’d deliver this, and you missed 3 weeks later. Jeff has a credibility issue.”
Mr. Welch was absolutely right: Immelt has no credibility left. His excuse? "[GE] had planned for an environment that was going to be challenging...[but] after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments and this was something that we clearly didn't see until the end of the quarter." A top CEO should have a better handle on his business.
On September 25th, with the stock trading at $25.50, Immelt lowered GE’s earnings guidance, suspended its $15 billion stock buyback plan and declared no outside capital was needed. One week later, he convinced Warren Buffet to invest $3 billion in the company by paying him an annual dividend of 10% while granting him warrants to purchase $3 billion of common stock at $22.25. GE then sold $12 billion of additional shares at $22.25 to the public.
These weren’t the actions of a company or CEO in control of its fortunes. AAA-rated companies don’t have to pay 10% interest rates. Credit default swaps protecting against GE Capital default traded as if GE were a junk-bond credit.
No positions in stocks mentioned.
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(18)
Reply
2008-11-17 11:30:17
DUH what a dummy!
How can you berate GE for having its stock down in this market you idiot!
2008-11-17 11:47:05
GE leverage and the dooms day pundit
Rather a funny article . not sure if the writer understands what he is talking about . GE has a finance arm and NO finance arm ever does business or can do business with out leverage . It is that leverage that provides the needed return . One just needs to leverage right . GE Capital as the financing arm does precisely that. It makes money by leveraging and the profits go to the investors in GE. Would the writer know that GE Capital has earned more money these past 3 quarters that most of Financial services companies including banks. Just think about it . Can Governments collapse . Yes they can . Other than God no body is forever safe . GE has a great management team that it may well be the last company standing .. The stocks might not have performed as acquisitions did not return as much as needed for the price paid . But that is another story . there are acquisitions which have returned more than expected too . It is one company that can take a lot of shocks and still be around..Vish
2008-11-17 11:49:59
DUH what a dummy!
Because of their stupid decisions. How does Immelt rate 72M over 5 years?
2008-11-17 11:58:47
GE leverage and the dooms day pundit
I guess the bright spot in all this is that companies will not have to "manage" their earnings. Ceo's can focus on running the business instead of kowtowing to wall street analysts.
2008-11-17 16:47:22
Live long and perspire
Will I live long enough for the fools that pay these overrated suits mega millions, to realize that no one is worth that kind of money?
No one. Not evne the good ones. And there are almost no good ones, as you have found out the hard way.
Stock only. Sellable only after a long vesting period. Very little cash. You blow up the company you get nothing, which is what you deserve.
No one. Not evne the good ones. And there are almost no good ones, as you have found out the hard way.
Stock only. Sellable only after a long vesting period. Very little cash. You blow up the company you get nothing, which is what you deserve.
2008-11-17 18:27:08
Crazy
Sir, I work for the Private Label portion of the GE business you speak about in the article. I work in the fraud department. You're correct, Jeff has made 2 statements in 2008 he shouldn't have. He said one thing and then had to turn around, eat humble pie, go against his word and do what's best for his company. Don't you think he knows people were going to blast him for his selling of stock? Of course he did - Unlike these other Wall Street schmucks - he did it. Why? Because he knew GE could be in trouble if he didn't. Times DID change this fast - he had to act.
I also agree that the company got addicted to "securitization" at the end of each quarter. Getting rid of this will actually make us a stronger company.
The difference between Immelt and the rest of wall street, is now his poor GE capital will be the most profitable bank in the world in 2008. That is too bad.
The difference between him and you is the fact that he actually sticks his neck out and does something. He doesn't write based on hindsight and poor statistics.
I guess you saw all of this coming didn't ya? You don't own anyones stock because you got out in October of 2007. You can say this stuff about every company in the world. I'll keep investing in my company and time will tell who is right.
BLKeller
I also agree that the company got addicted to "securitization" at the end of each quarter. Getting rid of this will actually make us a stronger company.
The difference between Immelt and the rest of wall street, is now his poor GE capital will be the most profitable bank in the world in 2008. That is too bad.
The difference between him and you is the fact that he actually sticks his neck out and does something. He doesn't write based on hindsight and poor statistics.
I guess you saw all of this coming didn't ya? You don't own anyones stock because you got out in October of 2007. You can say this stuff about every company in the world. I'll keep investing in my company and time will tell who is right.
BLKeller
2008-11-17 19:21:27
Come on...
GE Capital will make more than any other lending institution in the world this year.
Jeff has positioned the company globally, and will reap the benefits of being in all the right growth businesses over the next 10-25 years.
Also, he was paid $72M over 5 years for running a company that actually has REAL EARNINGS!! Go attack the Wall Street criminals that paid their CEO's 10X what Immelt made and now has nothing to show for it.
Jeff has positioned the company globally, and will reap the benefits of being in all the right growth businesses over the next 10-25 years.
Also, he was paid $72M over 5 years for running a company that actually has REAL EARNINGS!! Go attack the Wall Street criminals that paid their CEO's 10X what Immelt made and now has nothing to show for it.
2008-11-17 20:50:27
Could GE Collapse
Jack Welch sounds upset with his former whiz kid, Mr Immelt. Well Jack, your other two GE whiz kids have not done well either in managing a company, one Home Depot then Chrysler, and one at Boeing.
2008-11-17 21:27:49
DUH what a dummy!
Yeah...everything is fine...we can continue to invest in hollow promises and empty vaults.
You forget what happens if people don't pay their debts while at the same time investors lose faith in GE's solvency.
Oooops.
I think that is what he is pointing out.
Most of the negatives about this article sound like anger born out of fear.
2008-11-18 14:12:23
I hope they fail
They have to. If not, every badly managed company will realize that it can loot off the producers. How long do you think the producers will accept that?
There is a new writer on the scene who is saying what we all feel. She is honest and tells it like it is:
http://www.lewrockwell.com/orig8/hamilton6.html
http://www.lewrockwell.com/orig8/hamilton7.html
http://www.lewrockwell.com/orig8/hamilton8.html
I know you will like them. Pass them on.
There is a new writer on the scene who is saying what we all feel. She is honest and tells it like it is:
http://www.lewrockwell.com/orig8/hamilton6.html
http://www.lewrockwell.com/orig8/hamilton7.html
http://www.lewrockwell.com/orig8/hamilton8.html
I know you will like them. Pass them on.
2008-11-21 23:31:46
Emotion anybody!?
Thanks Prof. Quinn for exposing such detail upon GE.
I have a friend who worked for GE Capital from the late 90's to the early 2000's. We oft discussed the fate of, as what was then unknown to me,
GE's banking future. His primary roll was to grab wealthy investors for speculative Real Estate deals. Problem was he had a conscious. He's now a minister for the Methodist system, recognizing that he fell into the lower 10% of then Welche's
mandate of performance, he bailed. Penance, I suppose.
You certainly have hit the nerve with this article. Massive company performance
at any cost within it's Financial segment. It has worked well, until now. Those who bemoan it's demise just don't get it, as is obvious by our recent election. Selfish short term interest comes at the cost of long term performance. Time
to pay the piper. People recognize insincerity, the con in confidence, even if it
is only on a subconscious level. Self preservation is innate and instinctive. Those who ignore it think they can elude it's consequences, but in the end we will all suffer their pretense.
Should I feel for those, GE, investors and otherwise who are clearly suffering now
from such betrayal. I wish I could, but I can't. There's a great deal more adjustment coming for all of us. Yours just comes from a higher level. Those of us lesser haves are going to feel the pain for basic necessities much more profusely, so my empathy runs rather shallow. Sacrifice is the cost of abandoning responsible citizenship.
Markets serve up unequivocal justice. What I hear in these posts is a selfish cry for mercy
and preservation. We will receive justice and for that I am grateful. Real change requires real pain. My hope is that the change comes through civilized versus riotous action and that will only occur with thoughtful erudition.
Purpose, it is what drives us, defines us, binds us and ultimately unites us. My hope is
that the goal will be to elevate enlightenment that the individual matters, that
dignity is paramount and equability through justice prevails no matter your socioeconomic status. Then and only then will the winds of change make a difference to our personal well being.
I leave you with this....
However little it may often appear to be true, the social world is governed in the long run by certain moral principles on which the people at large believe. The only moral principle which has ever made the growth of an advanced civilization possible was the principle of individual freedom, which means that the individual is guided in his decisions by rules of just conduct and not by specific commands. No principle of collective conduct which bind the individual can exist in a society of free men. What we have achieved we owe to securing to the individuals the chance of creating for themselves a protected domain (their property) within which they can use their abilities for their own purposes.
Friedrich A. Hayek
Law, Legislation, and Liberty,
Vol. 3, p 151-2
I have a friend who worked for GE Capital from the late 90's to the early 2000's. We oft discussed the fate of, as what was then unknown to me,
GE's banking future. His primary roll was to grab wealthy investors for speculative Real Estate deals. Problem was he had a conscious. He's now a minister for the Methodist system, recognizing that he fell into the lower 10% of then Welche's
mandate of performance, he bailed. Penance, I suppose.
You certainly have hit the nerve with this article. Massive company performance
at any cost within it's Financial segment. It has worked well, until now. Those who bemoan it's demise just don't get it, as is obvious by our recent election. Selfish short term interest comes at the cost of long term performance. Time
to pay the piper. People recognize insincerity, the con in confidence, even if it
is only on a subconscious level. Self preservation is innate and instinctive. Those who ignore it think they can elude it's consequences, but in the end we will all suffer their pretense.
Should I feel for those, GE, investors and otherwise who are clearly suffering now
from such betrayal. I wish I could, but I can't. There's a great deal more adjustment coming for all of us. Yours just comes from a higher level. Those of us lesser haves are going to feel the pain for basic necessities much more profusely, so my empathy runs rather shallow. Sacrifice is the cost of abandoning responsible citizenship.
Markets serve up unequivocal justice. What I hear in these posts is a selfish cry for mercy
and preservation. We will receive justice and for that I am grateful. Real change requires real pain. My hope is that the change comes through civilized versus riotous action and that will only occur with thoughtful erudition.
Purpose, it is what drives us, defines us, binds us and ultimately unites us. My hope is
that the goal will be to elevate enlightenment that the individual matters, that
dignity is paramount and equability through justice prevails no matter your socioeconomic status. Then and only then will the winds of change make a difference to our personal well being.
I leave you with this....
However little it may often appear to be true, the social world is governed in the long run by certain moral principles on which the people at large believe. The only moral principle which has ever made the growth of an advanced civilization possible was the principle of individual freedom, which means that the individual is guided in his decisions by rules of just conduct and not by specific commands. No principle of collective conduct which bind the individual can exist in a society of free men. What we have achieved we owe to securing to the individuals the chance of creating for themselves a protected domain (their property) within which they can use their abilities for their own purposes.
Friedrich A. Hayek
Law, Legislation, and Liberty,
Vol. 3, p 151-2
2008-11-22 00:11:30
There was a lot more said here...
The biggest thing I caught was the short commentary on "earnings management". I'm not an accountant, but I actually understand much of what they do, and shuffling from off-balance sheet entities, playing with reserves in "black box" corporate entities and other such games should be fraud. The fact that he got hammered for missing earnings estimates is just silly. His predecessors should have been hammered for playing with the books to keep the analysts happy enough to keep selling his stock to retail investors. Any company that consistently hits earnings or exceeds by a penny should be investigated. The reality is that even a couple weeks before quarter end, senior management really doesn't know what the numbers will be unless they're cheating. To expect analysts with nothing other than management estimates to have some kind of magic lock on what should happen for the company's bottom line is optimistic in the extreme.
If you're investing in a company and haven't actually looked at balance sheets, quarterly reports and any other real information (stuff you can't alter without facing jail time), you're not investing, you're gambling. That's fine (I gamble regularly), just be aware of the distinction.
Cheers,
Colin
If you're investing in a company and haven't actually looked at balance sheets, quarterly reports and any other real information (stuff you can't alter without facing jail time), you're not investing, you're gambling. That's fine (I gamble regularly), just be aware of the distinction.
Cheers,
Colin
2008-11-22 00:25:47
Misleading title
This piece is obviously biased against GE, which is fine because it's an op-ed. But a more appropriate title would be "Why GE Should Fail," since the writer tends to make assumptions to support his claims and offers no objectivity or counter point as to why GE may survive. In his mind, it is already a foregone conclusion.
2008-11-22 01:37:38
Sad but seemingly true
I'm a big GE fan, of their appliances at least. Given a choice I wouldn't have any other brand, and have at least ten things I use every day that are made by the company - not counting light bulbs! lol
However, I wouldn't buy their stock with my worst enemy's money. Well, maybe...Just the things that we KNOW are true - global recession, GE's tapping the Fed's help, their inability to sell their businesses despite shopping them fervently, their unheard-of earnings miss, consumer (and business) credit exposure, the need to refinance debt in a really terrible credit market, etc. etc. Not to mention the all-too-obvious fact that HUGE money is constantly sitting on the sell button for the stock - it's hard to see how the company isn't in very big trouble. The fact that they have lots of company in this mess isn't very comforting to a shareholder, I don't think.
I'm not CEO material, and always hesitate to judge where I can't walk, so I don't know who is to blame or if anyone really is - just the state of the world and the businesses they're in are enough reason for their current situation and it's easy to see there are even tougher times ahead.
GE is an American icon, and like GM brings childhood memories of Malibus and Impalas my folks had, I can see Granny's old kinda round-cornered fridge not much taller than short me, with the General Electric lettering on the front. It feels like basic parts of our country's business structure are eroding away, along with scary amounts of human decency and common sense that seem to already be gone. I do hope GE doesn't fail, for many reasons, one being it's always seemed to have a certain dignity and that certainly would be lost in a bailout; another being the zillions of hard-working people with it in their 401(k)'s. But as it's said in the 'Ville, hope isn't a viable investment strategy. If it has to put out more than it brings in, sayonara.
It's all very sad. I think I need a new dishwasher.
However, I wouldn't buy their stock with my worst enemy's money. Well, maybe...Just the things that we KNOW are true - global recession, GE's tapping the Fed's help, their inability to sell their businesses despite shopping them fervently, their unheard-of earnings miss, consumer (and business) credit exposure, the need to refinance debt in a really terrible credit market, etc. etc. Not to mention the all-too-obvious fact that HUGE money is constantly sitting on the sell button for the stock - it's hard to see how the company isn't in very big trouble. The fact that they have lots of company in this mess isn't very comforting to a shareholder, I don't think.
I'm not CEO material, and always hesitate to judge where I can't walk, so I don't know who is to blame or if anyone really is - just the state of the world and the businesses they're in are enough reason for their current situation and it's easy to see there are even tougher times ahead.
GE is an American icon, and like GM brings childhood memories of Malibus and Impalas my folks had, I can see Granny's old kinda round-cornered fridge not much taller than short me, with the General Electric lettering on the front. It feels like basic parts of our country's business structure are eroding away, along with scary amounts of human decency and common sense that seem to already be gone. I do hope GE doesn't fail, for many reasons, one being it's always seemed to have a certain dignity and that certainly would be lost in a bailout; another being the zillions of hard-working people with it in their 401(k)'s. But as it's said in the 'Ville, hope isn't a viable investment strategy. If it has to put out more than it brings in, sayonara.
It's all very sad. I think I need a new dishwasher.
2008-11-23 19:37:55
I realy like this thread.
I realy like this thread. There are still some bulls here . . . buy 'n hold . . .
Don't any one of you remember INTC selling puts against their own stock to push earnings.
It was one of the first sign of problems.
INTC was the canary in the coal mine for the tech melt just as GE was for this "finance in drag" melt. And Ford and GM and so on. . . .
Only this melt includes everyone! not just finance.
Looking for a model for the "over due correction" . . . the over sold rally? the incredable valuations? . . . the great yields? the selling exhaustion? . . . . look no further than Naz 5K!
Minyan Terry
Don't any one of you remember INTC selling puts against their own stock to push earnings.
It was one of the first sign of problems.
INTC was the canary in the coal mine for the tech melt just as GE was for this "finance in drag" melt. And Ford and GM and so on. . . .
Only this melt includes everyone! not just finance.
Looking for a model for the "over due correction" . . . the over sold rally? the incredable valuations? . . . the great yields? the selling exhaustion? . . . . look no further than Naz 5K!
Minyan Terry
2008-11-23 21:47:14
GE's future - What does Madman Cramer Say?
surely he'll have some reasoned, sound, unbiased advice lol
the sad fact is, the symbiotic relationship between corporate america & wall street analysts, brokerages and banks in a never ending pursuit of earnings growth helped drive the focus away from much more difficult genuine innovation and productivity improvements and instead to "leading edge" financial & accounting gimmickry that was reinforced by analysts' reliance on them to support their inflated estimates and recommendations, which in turn reinforced more black box corporate reporting...
now that little toto has pulled back the curtain and exposed the heretofore mysterious wizardry on wall street as nothing more than the pulling back & forth of levers and gadgets masquerading as real production gains in the economy, the realization of the scope and depth of the sham is revealed, much to the shock & horror of many.
personal attacks on the author rather than trying to refute the points he made suggest to me that he has struck some very frayed nerves that don't want to believe the writing on the wall but rather wish to remain in denial, hoping it is just a bad dream that will go away when they wake up...
in a world where supposed passing off risk has been made into an art form by wall street, it is no wonder that when there is no one left to pass it off to, reality is very difficult and depressing to deal with.
the sad fact is, the symbiotic relationship between corporate america & wall street analysts, brokerages and banks in a never ending pursuit of earnings growth helped drive the focus away from much more difficult genuine innovation and productivity improvements and instead to "leading edge" financial & accounting gimmickry that was reinforced by analysts' reliance on them to support their inflated estimates and recommendations, which in turn reinforced more black box corporate reporting...
now that little toto has pulled back the curtain and exposed the heretofore mysterious wizardry on wall street as nothing more than the pulling back & forth of levers and gadgets masquerading as real production gains in the economy, the realization of the scope and depth of the sham is revealed, much to the shock & horror of many.
personal attacks on the author rather than trying to refute the points he made suggest to me that he has struck some very frayed nerves that don't want to believe the writing on the wall but rather wish to remain in denial, hoping it is just a bad dream that will go away when they wake up...
in a world where supposed passing off risk has been made into an art form by wall street, it is no wonder that when there is no one left to pass it off to, reality is very difficult and depressing to deal with.
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