The Smart Asset

G.E.: The dim before the shatter

By Harkavy in Bankers, Featured, Goniffs

Wednesday, Mar. 4 2009 @ 8:29AM

It would be so nice to see the perpetually smug look wiped off Jeff Immelt's face, but ask yourself: Is it worth suffering another death blow to the global economy?

While you weigh the pros and cons, Immelt's General Electric, its share price having plummeted from a 52-week high of 38.52 to 7.01 this morning, is on the verge of shattering.

Immelt's carney persona is really getting on people's last nerve. On Seeking Alpha, Todd Sullivan's appraisal of Immelt's P.R. performance is headlined: "Jeff Immelt, Please Stop Talking."

Immelt's chatter no longer matters anyway. "GE Inspires Giant Wagers," the Wall Street Journal headlines this morning — and most of the bets in extremely heavy options trading are against the company, which is mired in the muck of credit default swaps.

G.E.'s gargantuan financial-services business — the bright idea of former chairman "Neutron Jack" Welch, G.E. Capital became the planet's largest nonbank finance company — is dragging down the lightbulb maker and its profitable and showy (NBC) businesses. See "Baked-In Losses Weigh on G.E." in the March 2 Times:

For all the profits GE Capital has generated in good times, it has laid G.E. low today. The lender's troubles were the primary force behind the company's move last week to reduce its dividend by two-thirds. That will help conserve cash, but it does not guarantee that G.E. will retain its triple-A credit rating.

The damage that G.E.'s ownership of the finance arm has wrought on shareholders is staggering. Since the beginning of last year, G.E. has lost nearly $300 billion of market value. Put that in context: it is twice the loss of market capitalization at the biggest, baddest boy of the current credit crisis -- Citigroup.

But let's get current: Most banks are quickly becoming nonbanks these days because of the toxic assets they once greedily swallowed up. The same danger lurks for nonbank finance companies like G.E. Capital, which, if bearish options traders are correct, is on the verge of becoming a nonbank nonbank. In "GE Capital Continues To Spark Concern," the WSJ's Paul Glader writes this morning:

Concerns grew about potential "time bombs" lurking within General Electric Co.'s lending arm, even as Chairman and Chief Executive Jeffrey Immelt voiced optimism....

Investors and analysts remained anxious Tuesday. GE shares dipped below $7 before trading at $7.01, down 59 cents, at 4 p.m. on the New York Stock Exchange. The drop put GE shares down 79% from a year earlier.

"Time bombs"? Like these, a Times story explains:

GE Capital's immediate problem relates to concerns that some of the assets on its $660 billion balance sheet have baked-in losses the company doesn't have to take. Deutsche Bank estimates that GE Capital has unrealized losses of some $21 billion.

As for the reality of imminent losses, Fortune's Katie Benner writes this morning, in "GE's $8 billion risk: Things may soon get a lot worse for the economy's bellwether company":

General Electric may have slashed its dividend to shore up its balance sheet, but a looming ratings downgrade could push it into a cash shortage and funding problems.

If any ratings agency downgrades the credit rating on GE Capital three notches from its current AAA credit rating to AA- (or AA3 in Moody's rubric), GE Capital could be forced to pay out more than $8 billion immediately, according to its annual report. To put that in context, analysts estimate that all of GE will earn about $12 billion in 2009.

Even one of G.E.'s own tentacles, CNBC, noted on March 2:

"And in another piece of bad news, the credit default swaps on five-year notes for GE Capital, the finance arm, actually are now trading on an up-front basis meaning if you're going to insure $10 million worth of these notes you're going to have to first of all pay the insurer $850,000 up front in addition to a $500,000 annual fee. Basically reflecting the concerns about the risk of GE."

Immelt, a huckster who regularly blames everyone but himself for G.E.'s problems, now admits that G.E.'s rep has been "tarnished." But his latest stab at restoring luster — his and G.E. Capital chief Michael Neal's token purchase of their company's shares — hasn't impressed anyone, says gurufocus.com.

Meanwhile, the plan for global conquest concocted by the sainted Welch and his acolyte Immelt has reaped a whirlwind of even more danger. The WSJ noted yesterday:

Investors are nervous about European banks' exposure to Eastern Europe's faltering economies. But one large U.S. lender also has quite a presence in the region: GE Capital.

General Electric's stock has more than halved this year on concerns about GE Capital's balance sheet -- particularly its holdings of commercial real estate. But as Eastern European economies and currencies crumble, expect investors to start fretting about GE Capital's loans in places like Poland, Turkey and the Baltic states.

Turns out that Esquire's fatuous listing in September 2008 of the "75 Most Influential People of the 21st Century" really did speak the truth. The formerly great magazine explained its guidelines:

We set out to find them across every field of endeavor, the people who are bending history right now. It was an impossible task, but the result is a determined, defiant, earnest, brilliant, philanthropic, space-going, smoking-hot group, and together they are writing the first chapter of the rest of our lives.

And Esquire included Jeff Immelt "because GE is the prototypical company and he is the prototypical CEO of the 21st century."