Reckoning at Hand for General Electric?

If your hackles are not yet up concerning the outlook for highly indebted multinational companies such as GE in a possible looming crisis of 2018, they ought to be.  From September 2008 until recently, we operated in a new world without traditional controls, prepared to believe everything and happy to own almost anything.  Skeptics were mocked, as markets rocked.

However, in recent months, benchmark interest rates in the United States – the largest market in the world – are trending upward after ten years at historic low levels.  As interest rates rise, most asset values will fall.  Declining asset values are especially worrying for complex borrowers like GE.

Now, investors are, again, agonizing, trying to assess how rising interest rates will affect the values of companies.  It is no wonder that GE and its stock price should be back in the spotlight.

Awaiting Crucial GE Details

GE's comprehensive annual report for 2017 will emerge soon.  Meanwhile, selling pressures have accentuated following the disappointing fourth quarter 2017 "earnings call" on January 24, 2018.

Judging preliminary financial estimates, a decade's worth of restructuring and finagling yields a still complex collection of businesses, stretched all over the world.

GE's new management's recent disclosures show a company too large to achieve enticing growth rates in revenues, profits, and free cash flow, and too financially weak to shoulder liabilities that might crystallize in a resurgent global crisis.

As of December 31, 2017, GE had $378 billion in total assets, $135 billion in total debt, and only $64 billion left in shareowners' equity, following massive share repurchases and recent losses.  More concerning, $104 billion of assets is in "goodwill and other intangibles."

In a new crisis, this large slice of GE's balance sheet would not be saleable quickly, or at stated values.  Take these soft assets out of the equation, and GE's "tangible" shareowners' equity value falls to negative $40 billion, scant protection in tumult.

The picture darkens further when comparing GE's U.S. and foreign financial results and position.  No company is yet required to dive below the surface and show more than global consolidated financial statements.  Seen on a nation-by-nation basis, GE's obligations and exposures in worst-case scenarios could prove even more challenging than management's latest estimates suggest.

So investors in GE common shares are correct to fear the worst, particularly if pessimistic that benchmark interest rates are going to rise.  Any one of many flashpoints might curtail economic activity and threaten global trade.

Learning from History?

Ten years ago, I circulated independent research on General Electric titled "Too Much Imagination at Work?"  A moated, "bricks and mortar" darling after the internet bubble burst early in 2000, GE started to falter badly in 2007 and faced the worst by August 2008, as the last financial crisis erupted to devastating effect.

From public sources, it was clear that GE Capital was a gigantic and troubled financial institution – hidden inside a sprawling multinational conglomerate.  In thousands of pages of filings, nowhere did GE management present granular information about trends in its non-finance portfolio.  This omission was crucial in 2008, and it is still true.  No outsider actually knows which pieces within GE contribute most and least to consolidated financial results.  Worse, no national regulator adequately understands GE's external international obligations and commitments.

As global capital markets roiled starting early in September 2008, GE nearly failed.  In hindsight, American politicians and regulators "rescued" GE (among other financial institutions) and, with Davos men and women, temporarily saved the world economy from implosion by bending the rules.  This is a bad habit to get into.

Warren Buffett bought high-yielding preferred shares.  Turbo-charged warrants were used to induce retail and other investors to buy riskier GE common shares – investors were urged to "Buy American" and follow Warren Buffett's lead.  But purchasers of GE common shares didn't get Buffett's deal, and the SEC was not of a mind to quibble in the middle of crisis.

Second, GE Capital was allowed to sell debt securities backed using the FDIC's temporary liquidity guarantee program.  This staved off a refinancing debacle as its commercial paper and other debts matured during the worst moments through March 2009.  In panic mode, extending lifelines to numerous even bigger financial institutions, many bought into the argument that the collapse of still highly rated GE Capital would compound counterparty risks and potentially tank the entire global economy, so accommodations were made.

Third, governments borrowed recklessly from future generations to fund yawning deficits, while central banks coordinated efforts to suppress key lending rates.  These practices, meant to be only temporary, continued for more than a decade.

As we contemplate options for GE now, we must remember that these extraordinary measures created conditions where it was much easier to unload assets than it likely will be in the future.

It wasn't "easy being green" for GE under Obama

Under Jeff Immelt from March 2009 through his departure in 2017, GE's directors, executives, and professional advisers evidently learned little from their "near-death" experience.  Perhaps Immelt should have spent less time working with President Obama and more time on his day job at GE.

Early on, Immelt cheered the Obama administration's reckless attempt to stimulate the American economy by throwing almost a trillion dollars toward unvetted plans.

By 2011, after doling out hundreds of billions of taxpayer dollars to finance "infrastructure" projects that, in theory, were primed for action, Immelt and President Obama actually thought it was funny that "shovel-ready jobs" and private-sector incomes did not materialize as originally promised.

A full reckoning is overdue, especially if we wish to learn from mistakes made during the Obama years "managing" the economy – certainly in the energy sector, where commodity prices remain well under 2008 peak levels, the list of taxpayer funded failures is long.

Public appetite for another GE rescue?

Ignoring sums wasted rescuing GE during the first crisis and then supporting Immelt and the Obama administration's failed energy stimulus, will American voters countenance a third tranche of taxpayer aid for this fading component of the Dow-Jones Industrial Average if rising interest rates and increasing volatility provoke another crunch?

In 2008, too many smart people bought the lie that GE's non-financial operations would end up having sufficient strength to repay the FDIC if GE Capital defaulted on its debt obligations.  Fortunately, GE Capital is now almost wound down, but unfortunately, stresses upon GE's once formidable remaining businesses are our present concern.

Should events close in again on GE in 2018, a large manifestly solvent entity may have to step in to save the day.  The only entities that can move decisively and with the resources that may be required are our federal government or our central bank.

If the 2016 election taught us anything, it is that Trump Republicans, Independents, and Progressives have little appetite to rescue rich, politically connected cronies who stumble, particularly ones that have been supported for so long without learning from history.

Should rising interest rates provoke another financial crisis in 2018, the biggest unanswered question likely to affect price performance of GE common shares is whether governments and central banks are prepared to redeploy tools used in the past crisis to support what remains of GE in the looming one.

Given a long track record of poor transparency and poor performance for shareowners, little said by GE insiders and their advisers matters.

If your hackles are not yet up concerning the outlook for highly indebted multinational companies such as GE in a possible looming crisis of 2018, they ought to be.  From September 2008 until recently, we operated in a new world without traditional controls, prepared to believe everything and happy to own almost anything.  Skeptics were mocked, as markets rocked.

However, in recent months, benchmark interest rates in the United States – the largest market in the world – are trending upward after ten years at historic low levels.  As interest rates rise, most asset values will fall.  Declining asset values are especially worrying for complex borrowers like GE.

Now, investors are, again, agonizing, trying to assess how rising interest rates will affect the values of companies.  It is no wonder that GE and its stock price should be back in the spotlight.

Awaiting Crucial GE Details

GE's comprehensive annual report for 2017 will emerge soon.  Meanwhile, selling pressures have accentuated following the disappointing fourth quarter 2017 "earnings call" on January 24, 2018.

Judging preliminary financial estimates, a decade's worth of restructuring and finagling yields a still complex collection of businesses, stretched all over the world.

GE's new management's recent disclosures show a company too large to achieve enticing growth rates in revenues, profits, and free cash flow, and too financially weak to shoulder liabilities that might crystallize in a resurgent global crisis.

As of December 31, 2017, GE had $378 billion in total assets, $135 billion in total debt, and only $64 billion left in shareowners' equity, following massive share repurchases and recent losses.  More concerning, $104 billion of assets is in "goodwill and other intangibles."

In a new crisis, this large slice of GE's balance sheet would not be saleable quickly, or at stated values.  Take these soft assets out of the equation, and GE's "tangible" shareowners' equity value falls to negative $40 billion, scant protection in tumult.

The picture darkens further when comparing GE's U.S. and foreign financial results and position.  No company is yet required to dive below the surface and show more than global consolidated financial statements.  Seen on a nation-by-nation basis, GE's obligations and exposures in worst-case scenarios could prove even more challenging than management's latest estimates suggest.

So investors in GE common shares are correct to fear the worst, particularly if pessimistic that benchmark interest rates are going to rise.  Any one of many flashpoints might curtail economic activity and threaten global trade.

Learning from History?

Ten years ago, I circulated independent research on General Electric titled "Too Much Imagination at Work?"  A moated, "bricks and mortar" darling after the internet bubble burst early in 2000, GE started to falter badly in 2007 and faced the worst by August 2008, as the last financial crisis erupted to devastating effect.

From public sources, it was clear that GE Capital was a gigantic and troubled financial institution – hidden inside a sprawling multinational conglomerate.  In thousands of pages of filings, nowhere did GE management present granular information about trends in its non-finance portfolio.  This omission was crucial in 2008, and it is still true.  No outsider actually knows which pieces within GE contribute most and least to consolidated financial results.  Worse, no national regulator adequately understands GE's external international obligations and commitments.

As global capital markets roiled starting early in September 2008, GE nearly failed.  In hindsight, American politicians and regulators "rescued" GE (among other financial institutions) and, with Davos men and women, temporarily saved the world economy from implosion by bending the rules.  This is a bad habit to get into.

Warren Buffett bought high-yielding preferred shares.  Turbo-charged warrants were used to induce retail and other investors to buy riskier GE common shares – investors were urged to "Buy American" and follow Warren Buffett's lead.  But purchasers of GE common shares didn't get Buffett's deal, and the SEC was not of a mind to quibble in the middle of crisis.

Second, GE Capital was allowed to sell debt securities backed using the FDIC's temporary liquidity guarantee program.  This staved off a refinancing debacle as its commercial paper and other debts matured during the worst moments through March 2009.  In panic mode, extending lifelines to numerous even bigger financial institutions, many bought into the argument that the collapse of still highly rated GE Capital would compound counterparty risks and potentially tank the entire global economy, so accommodations were made.

Third, governments borrowed recklessly from future generations to fund yawning deficits, while central banks coordinated efforts to suppress key lending rates.  These practices, meant to be only temporary, continued for more than a decade.

As we contemplate options for GE now, we must remember that these extraordinary measures created conditions where it was much easier to unload assets than it likely will be in the future.

It wasn't "easy being green" for GE under Obama

Under Jeff Immelt from March 2009 through his departure in 2017, GE's directors, executives, and professional advisers evidently learned little from their "near-death" experience.  Perhaps Immelt should have spent less time working with President Obama and more time on his day job at GE.

Early on, Immelt cheered the Obama administration's reckless attempt to stimulate the American economy by throwing almost a trillion dollars toward unvetted plans.

By 2011, after doling out hundreds of billions of taxpayer dollars to finance "infrastructure" projects that, in theory, were primed for action, Immelt and President Obama actually thought it was funny that "shovel-ready jobs" and private-sector incomes did not materialize as originally promised.

A full reckoning is overdue, especially if we wish to learn from mistakes made during the Obama years "managing" the economy – certainly in the energy sector, where commodity prices remain well under 2008 peak levels, the list of taxpayer funded failures is long.

Public appetite for another GE rescue?

Ignoring sums wasted rescuing GE during the first crisis and then supporting Immelt and the Obama administration's failed energy stimulus, will American voters countenance a third tranche of taxpayer aid for this fading component of the Dow-Jones Industrial Average if rising interest rates and increasing volatility provoke another crunch?

In 2008, too many smart people bought the lie that GE's non-financial operations would end up having sufficient strength to repay the FDIC if GE Capital defaulted on its debt obligations.  Fortunately, GE Capital is now almost wound down, but unfortunately, stresses upon GE's once formidable remaining businesses are our present concern.

Should events close in again on GE in 2018, a large manifestly solvent entity may have to step in to save the day.  The only entities that can move decisively and with the resources that may be required are our federal government or our central bank.

If the 2016 election taught us anything, it is that Trump Republicans, Independents, and Progressives have little appetite to rescue rich, politically connected cronies who stumble, particularly ones that have been supported for so long without learning from history.

Should rising interest rates provoke another financial crisis in 2018, the biggest unanswered question likely to affect price performance of GE common shares is whether governments and central banks are prepared to redeploy tools used in the past crisis to support what remains of GE in the looming one.

Given a long track record of poor transparency and poor performance for shareowners, little said by GE insiders and their advisers matters.