By all accounts, except maybe his own, General Electric CEO Jeff Immelt has been a failure. I mean, the stock is down at 16, down from 40 just two years ago.
But things might be looking up for the I-man, thanks to Uncle Sam. As first reported in The Wall Street Journal, as as noted here at TCG two weeks ago--and now all over--GE is now lining up to receive the benefit of a $139 billion federal loan guarantee for its subsidiary, GE Capital--which is to say, GE is getting a subsidy. And of course, if GE gets a subsidy, then so does every subset of GE, including the news networks NBC, CNBC, and MSNBC.
Immelt and his GE team, including NBC-Universal prexy Jeff Zucker, have no obvious ability to run a media operation, as indicated by the sharp decline in NBC's election-night coverage. Although much-smaller MSNBC was up, which perhaps
But now Immelt is saying that he wants to do more media, telling The Financial Times, "There are going to be some opportunities in media consolidation."
But maybe the situation is more serious: One blogger, James Quinn, writing for writing for The Cutting Edge, asks bluntly, "Could General Electric Collapse?" and answers with a ream of data:
One look at GE’s balance sheet will convince an inquirer that the firm indeed does not deserve an AAA rating. AAA companies do not need to take the desperate actions that GE has taken in the last few months. Something is seriously wrong at GE.
And for this, Quinn asks, Immelt was paid $72 million from 2002 to 2007? As the stock has fallen 68 percent?
Here's more from Quinn, detailing why he thinks that GE is closer to junk than AAA:
Most people know GE as an industrial conglomerate that makes light bulbs, appliances, and jet engines. Its advertising agency has positioned GE as a "green" company with an advertising campaign called "Ecomagination", stressing wind power, hybrid locomotives, and environmentally friendly products. But it is easy to see why GE’s ad campaign should be called "Bankomagination." Truth: GE is actually a bank disguised as an industrial conglomerate. The GE Capital division truly dominates the results of the entire company.
Let’s look at GE Capital, which has three subdivisions GE Commercial Finance, GE Money, and GE Consumer Finance. In 2003, GE Capital generated $5.9 billion of larger GE’s $17 billion of profits, or 35 percent. By 2007, GE Capital was generating $12.2 billion of larger GE’s $29 billion profits, or 42 percent. Being a bank during the boom years of 2004 to 2007 did wonders for GE’s bottom line. Being a bank now is a rocky path to destruction.
GE Capital is enormously leveraged to consumers throughout the world. GE Capital provides credit services to more than 130 million customers, including private label credit card programs, installment lending, bankcards and financial services for customers, retailers, manufacturers and health-care providers. This massive portfolio is heavily concentrated in credit cards for Wal-Mart, Lowe’s, IKEA, and hundreds of other retailers throughout the world. Billions are tied up in debt consolidation to home equity loans. The division also owns 1,800 commercial airplanes, leasing them to 225 airlines worldwide. GE Capital has also been a huge benefit to the industrial side of the company’s business. GE Capital provides financing for customers that buy GE power turbines, jet engines, windmills, locomotives and other big ticket items.
The crucial question is this: can the people and companies who received loans from GE Capital pay them back? GE’s entire future is highly dependent on the answer to this question. But look at the trillions in global defaults towering throughout the industrial world.
The GE's AAA rating allows GE Capital to borrow funds at lower rates than all banks in the United States. Its cost of capital has been 7.3 percent. Losing that rating would be disastrous to GE Capital. Between 2002 and 2006, GE Capital did what most other banks did—they levered up. The company’s ratio of debt to equity rose from 6.6 to 8.1 during the heady years when profits quadrupled. Then, GE Capital jumped into the subprime mortgage market in 2004, buying WMC Mortgage. It sold the bleeding subsidiary in 2007, after racking up losses of $1 billion that year. It also unloaded a Japanese consumer lending company at a $1.2 billion loss that same year, 2007.
It is clear that risk management has taken a back seat to profits at GE Capital. GE Capital’s profits plunged 38 percent in the 3rd quarter, the main reason for GE’s earnings miss. Analyst Nicholas Heymann of Sterne Agee wrote: "Investors now understand that GE uses the last couple weeks in the quarter to 'fine-tune' its financial service portfolios to ensure its earnings objectives are achieved. It turns out, it really wasn't miracle management systems or risk-control systems or even innovative brilliance. It was the green curtain that allowed the magic to be consistently performed undetected."
Egan-Jones, an independent rating agency, calculates that by now, GE is levered ten-to-one, a more conservative and higher number than the company's own stated eight-to-one figure. Cofounder Sean Egan believes that, depending on the off-balance-sheet holdings, actual leverage could be still higher. His firm rates GE not with a AAA but with a single-A. Looking at GE’s Balance Sheet between 2003 and today, a deteriorating situation is clearly tracked. Long-term debt grew from $172 billion in 2003 to $381 billion by the 1st quarter of 2008, a 121 percent increase. Their long term debt to equity ratio grew from 68 percent to 77 percent. Short-term debt grew from $157.4 billion in 2003 to $218.7 billion in the latest quarter, a 40 percent increase. The 70 percent increase in profits between 2003 and 2007 were undoubtedly juiced by the use of prodigious amounts of debt. Stockholder’s equity is at the same level as 2004. With cash of only $59.7 billion and short-term debt of $218.7 billion, the freezing up of the credit markets has put GE at major risk when trying to rollover their debt.
All indications point to a company in trouble. Mike Shedlock, a brilliant financial analyst, recently quoted an insider at GE Capital. "Sales personnel are not allowed to make any more loans this year, and are being told to try to get their customers to pay off their loans. All prepayment penalties are waved for closing loans and GE Capital is about to launch a new incentive scheme for the salespeople that makes it worth their while to get their customers to agree to participate." This sounds like the actions of a company desperately trying to pay down debt. The risks and unknowns for this company are many.
GE announced plans during the summer to sell its lighting and appliance business. It expected to get $5 to $8 billion for these divisions. But it has found no buyers. GE announced that it wanted to sell its private label credit card business, with $30 billion of outstanding receivables. It is not surprising that no buyers have appeared for that business either, especially since it is widely known that many of these receivables are owed by subprime borrowers. GE does not provide bad debt figures for these portfolios. Paying Warren Buffett 10 percent on preferred shares when their cost of capital has been 7.3 percent is a sign of intense stress. GE has $74 billion of commercial paper outstanding that rolls over every few days. GE was rumored to be unable to rollover this paper. They are now utilizing the Fed’s short-term funding facility. This is a sign of weakness.
GE holds $53 billion of off-balance-sheet assets that are pieces of securitized debt, some of which are hooked to interest rate swaps with counterparties that are now troubled. The value of these assets is a complete unknown, but is likely to be worth far less than $53 billion. GE’s recent 10Q had the following disclosure: "GE Capital has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. Many of these transactions expose GE Capital to credit risk in the event of default of its counterparty or client. In addition, GE Capital’s credit risk may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to it." Much of GE’s debt is covered by credit insurance. This insurance is virtually worthless, as the credit insurers have collapsed.
GE has $43 billion of long-term debt maturing by June 30, 2009, with another $38 billion due by December 31, 2009. The terms for refinancing this debt will be much worse than the previous terms. GE convinced the U.S. government to insure $139 in debt for GE Capital using the new FDIC program. Why does a AAA company need a government guarantee? Rumors of a dividend cut have been swirling in the business press. GE spokesmen have guaranteed the dividend only through 2009. Many other banks have promised no dividend cuts in the last year, only to cut dividends a month later.
The most hazardous unknown for GE is the global recession that will likely ravage the company in 2009. Their five main businesses (Technology Infrastructure, Energy Infrastructure, Capital Finance, NBC Universal and Consumer & Industrial) will all be under severe stress in 2009. Technology Infrastructure is dependent on airline and military spending. Airlines are struggling just to survive and conserve cash. The Obama administration is likely to reduce military spending dramatically. Energy Infrastructure is dependent on wind, oil and gas companies. With the spectacular decrease in oil prices, these companies are massively cutting capital budgets. Financing for large projects has dried up.
The conclusion are inescapeable. GE Capital is dependent on consumer credit, commercial lending & leasing, and real estate. This division will be overwhelmed by a tsunami of deleveraging in 2009. Consumers will be defaulting in record numbers and commercial real estate has just begun to implode. NBC Universal is reliant on advertising revenues from companies and consumer spending on entertainment. Every leading company in America will be reducing advertising budgets in 2009 and consumer discretionary spending is collapsing. The Consumer & Industrial sector is dependent on consumer’s spending money on appliances. A housing collapse has led to collapse in appliance sales, which will continue in 2009.
The future does not look bright for GE. A perfect global storm will hit GE in 2009. GE is like a giant supertanker loaded with debt that is in danger of being swamped by this perfect storm. A collapse of GE, with hundreds of billions in supposed value, would not bring good things to life. It would bring about the mother of all bailouts.
So yes, GE might yet need another bailout. But fortunately for Immelt, he has plenty of folks on his corporate team well wired into Washington--not just the usual lobbyists, but bigtime Obama/Democratic suckups, including Keith Olbermann, Rachel Maddow, and Chris Matthews.
So even if the real GE fails in the free market, Immelt can call upon his liberal friends to make him a big winner in the Beltway market.
