Saturday, March 7, 2009

What's ailing GE?

I'm so tired of Jeffrey Immelt saying that GE is in these "boring" businesses and that GE Capital just does these boring loans. Yesterday, on CNBC we saw GE's CFO Sherin making the case for GE.

Let's look at a statement from Sherin:

Over a three-year period here, we expect GE Capital to be profitable, even after $35 billion of losses and impairments. We're looking today for GE's total cash flow to be around $16 billion for the year. In our stress case we could be down in the $14 billion level. In either scenario, we can fund the company. If conditions were to deteriorate beyond what is in our stress scenario, we also have the option of scaling back originations in GE Capital to conserve cash and capital."

$35 billion?

What did Jeffrey Immelt say about GE Capital in his shareholder letter last week?

Going forward we expect 30% of our earnings to come from financial services....We are targeting our returns in financial services to be about 15%.

How does this jibe with $35 billion of impairments?

Maybe someone could just ask a shareholder who bought some of the 547.8 million shares of stock that GE unloaded at $22.25, when they were spinning their bullish tune!

Now we know the whole world is suffering from pension costs, and insurance companies that sold GIC's (guaranteed investment contracts) are also under noteworthy pressure.

GE also has GIC exposure.

On page 53 of GE's 2008 10k recently filed with the SEC, the company says that at the end of last year, if it had a rating below AA-, GE Capital would have been required to provide about $3.5 billion of capital to support a group of entities that are funded by issuing guaranteed investment contracts (GICs). A GIC provides a fixed return on an amount of capital that the GIC issuer invests.

Another entity at GE Capital also issues GICs and then loans the proceeds back to the finance arm. If GE Capital's rating were to fall below AA-, GE Capital would have to provide about $4.7 billion to repay the GIC holder.

But had the company sold the GICs at the end of 2008, according to the annual report, the fair value of their assets were only $9.2 billion and the liabilities totaled $10.7 billion, which would make a loss of about $1.5 billion.

GE's annual report also says that if the rating on GE, or applicable entities, falls below A-, then covenants will be triggered on its swap, forward and options contracts that force the company to pay money to its counterparties to account for the additional risk. The fair value of this risk was about $4 billion at the end of 2008, according to page 52 of the 10k.

And we know that GE is optimistic about the stock market, because of their goofy actuarial assumptions in their pension plans. But despite this, it will still cost GE another billion dollars this year in their pension plans, even with their fantasy 8.5% "projections."

And GE's pension plan, which was overfunded by $16.8 billion at year end 2007, was underfunded by $4.4 billion at year end 2008, a swing of over $21 billion dollars.

GE, however, assumes that the future will be rosy, and as in any of their financial services operations where they have losses, GE feels that they will disappear over time. They just hold everything to maturity!

But if you really want to look at GE, just check out note 9 in their annual report. They have unrealized losses up the wazoo, but GE doesn't recognize any of them, because of the following reasons:

We presently intend to hold our investment securities that are in an unrealized loss position at December 31, 2008, at least until we can recover their respective amortized cost. We have the ability to hold our debt securities until their maturities. In reaching the conclusion that these investments are not other-than-temporarily impaired, consideration was given to research by our internal and third-party asset managers. With respect to corporate bonds, we placed greater emphasis on the credit quality of the issuers. With respect to RMBS and commercial mortgage-backed securities (CMBS), we placed greater emphasis on our expectations with respect to cash flows from the underlying collateral, and with respect to RMBS, we considered the availability of credit enhancements, principally monoline insurance.

Now Sherin, the CFO, just told us that GE was prepared to take $35 billion of losses in GE Capital.

How accurate can this statement be, if GE doesn't recognize any losses because they have useless monoline insurance, or if they depend on the rating agencies for the solvency of the debts they hold?

And what happens then, if the rating agencies really look at what GE Capital is holding?

How ironic then, is it, that GE can be cut by the same sword that they use to defend?

GE is now in trouble, because they can't sell their poorly performing businesses. Remember Genworth that GE got rid of? How about FGIC? They also unloaded that, and they also dumped their life insurance to Swiss Re, who needed help from Buffett to absorb their losses!

GE tried selling their credit cards, and their appliance business, but in this environment, there just wasn't any takers.

How ironic is it also, that GE, who used to be such a smart seller, now has a stock price buffetted by "smart sellers!"

So we see what ails GE. GE is a good industrial company, built on a financial hedge fund, with a "private equity" component, that now has to eat their own cooking.

AIG was an insurance company built upon a hedge fund.

JPM is a good bank built upon a derivative hedge fund.

Those buying credit default swaps on GE, want them to be in the former category.

But GE, stays true to it's name, as it keeps investors in the dark regarding what really is on GE Capital's balance sheet.

GE only brings good things to light!

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