How GE Came to Grief: a Grant's Compendium
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® Special Edition Two Wall Street, New York, New York 10005 • www.grantspub.com NOVEMBER 3, 2017 How GE came to grief: a Grant’s compendium 1 Monetary corporate welfare the 5 /4s were quoted Tuesday at a price Under the cloak of to yield 1.54%. As for the new notes, $7 billion worth, respectability (September 21, 2012) After the Lehm- they were briskly bid for at yields of an Brothers bankruptcy in 2008, the Bush 0.85% for three years, 2.72% for 10 years (September 18, 2009) Wall Street administration, on behalf of the mute and 4.16% for 30 years. The Fed’s tiny was away from its desk when the Se- American taxpayer, opened the federal interest rates now subsidize a company curities and Exchange Commission and vaults to Wall Street. Sheila Bair, in her that, except for its doting Uncle Sam, General Electric Co. came to terms on new memoir of that crisis season (“Bull might not be around today in just its August 4. To settle charges of book- by the Horns”), recounts the decision to current form to borrow so much as a cooking and earnings manipulation, push TARP funds into the not necessar- dime. (Vis-à-vis GE, the government Thomas A. Edison’s corporate brain- ily needy arms of the CEOs of nine of the was not entirely doting; on Aug. 4, 2009, child neither admitted nor denied country’s largest banks and broker-deal- the company, or rather its shareholders, guilt, but paid a $50 million fine and ers. “Yes,” relates the former chairman of paid $50 million to settle SEC charges vowed never again to commit the sins the FDIC, “it had come to that: the gov- that it had cooked the books and ma- to which it had not confessed. A sell- ernment of the United States, the bastion nipulated earnings during the great bull side analyst obliged a reporter at The of free enterprise and private markets, market of the late 1990s and early 2000s; Wall Street Journal with the comment was going to forcibly inject $125 billion of see Grant’s, Sept. 18, 2009). Among the that, really, the revelations didn’t mat- taxpayer money into those behemoths to underwriters of the new GE issue was ter. While the accounting practices at make sure they all stayed afloat.” none other than Citigroup, about whose issue might have been “frustrating,” he General Electric was not among the serial bailouts and inexpert CEO Bair’s claimed, “they were never material.” nine. But it presently took its place at memoir is particularly scathing. They were and are material—and the government’s all-you-could-eat steam “Citi had essentially bought into all the entertaining, too, in a shabby kind of table. When it received $139 billion in gimmicks to generate short-term profits,” way—we are about to contend on this, FDIC debt guarantees and placed $16 she recites: “poorly underwritten loans, the first anniversary of the great trou- billion in commercial paper with the Fed- high-risk securities investments, and bles of 2008. The crimes to which GE eral Reserve, this bluest blood of Ameri- short-term unstable liquidity. It desper- allegedly stooped reveal a management can blue chips—the last of the original ately needed an experienced, traditional besotted with its own share price. More Dow stocks still in the Dow—was rated commercial banker to right the ship. broadly, the SEC complaint invites re- triple-A. Not many federal supplicants [Vikram] Pandit had no experience in consideration of an era in which power- have ever cut a more awkward appearance commercial banking and wouldn’t have ful people did their all to smooth out with a begging bowl. known how to underwrite a loan if his life the bumps. At GE, it was the untidy This was four years ago—four long depended on it. But he was the guy [Rob- ebb and flow of revenue that manage- years ago, to be sure. On Monday, the ert Rubin] wanted and the N.Y. Fed and ment sought to pretty up, even to the very same GE—no longer rated triple-A, the OCC acquiesced, so he got the job.” point of employing, as the SEC puts rather a slice or two beneath it, but still a “Proceeds” from the GE offering “will it, “devices, schemes or artifices to de- deep-blue blue chip—showed its face in be used to repay all or a portion of the fraud.” At the macro level, it was the the credit markets to refinance $5 billion company’s $5 billion of 5% notes due ups and downs of the economy itself of 5% notes due next Feb. 1. In the high- Feb. 1, 2013,” S&P reported. “Any re- that the Federal Open Market Com- cotton days of 2007, the company had maining proceeds will be used for general mittee worked to flatten. The “Great 1 placed an issue of 5 /4% notes due De- corporate purposes.” Moderation” is what economists call cember 2017. If proof were needed that Artificial, ultra-low rates harm many. the 20 or so years in which these efforts nobody holds a grudge for long on Wall But they do benefit some. seemed to bear fruit. It was a golden Street, at least not against an institution, • time of shallow recessions, measured GE compendium-GRANT’S / NOVEMBER 3, 2017 2 expansions and high “visibility.” As to for which a little good news can still go “The response of our business the visibility, the case of the “Securities a long way.” And the analysts, with C. leaders was typical of the GE cul- and Exchange Commission v. General Elec- Stephen Tusa Jr. in the lead, add that, ture,” Welch relates. “Even though tric Company” is a reminder of how little “[i]n the look for non-consensus, catch- the books had closed on the quarter, we ever really know. up stories, GE stands out as the last, many immediately offered to pitch in The eye that the stock market turns in our view.” Not disagreeing with this to cover the Kidder gap. Some said to history is dim enough. The one it uses judgment, we hereby lift our own fatwa they could find an extra $10 million, to see, but yet not to see, the transgres- on GE (e.g., Grant’s, Sept. 5, 2008), now $20 million and even $30 million sions of the great and good is—actu- quoted at 10.3 times trailing net income, from their businesses to offset the ally—legally blind, at least during the half of the post-1990 average of 22 times, surprise. Though it was too late, their bull portion of the cycle. So it was that, a fifth of the 51 times peak multiple at willingness to help was a dramatic “[b]eginning in 1995 and continuing year-end 1999 and at a 40% discount to contrast to the excuses I was hear- through the filing of form 10-K for the the valuations of its global peers. How- ing from the Kidder people.” This period ended December 31, 2004, GE ever, our interest in this investigation was, to repeat, in 1994, after which met or exceeded final consensus analyst is not so much the share price as the the Six Sigma GE accounting depart- earnings per share expectations every remarkable story of the company that ment somehow was able to match or quarter,” as the SEC describes it. In a couldn’t seem to stop watching it. beat each quarterly earnings estimate better world, investors would collective- The infractions that the SEC com- through Dec. 31, 2004. ly face federal charges for being so gull- plaint identifies allegedly occurred on Be that as it may, Immelt was in ible as to fall for such a thing. the watch of CEO Jeff Immelt in 2002 command when the SEC’s investiga- It’s a fine irony that GE, the bluest- and 2003. But Immelt’s predecessor, tion turned up four kinds of account- blooded of American blue chips, triple- Jack Welch, had run the company for ing irregularities. One had to do with A-rated from 1956 until 2009, the last the preceding 20 years until Sept. 6, interest-rate hedges on commercial-pa- of the original Dow stocks still in the 2001, and it might just be that Welch per borrowings, a second with another Dow, wound up funding itself through had something to do with the corporate kind of interest-rate hedge and a third such public assistance programs as the culture that valued the price of GE com- with the accounting for spare parts for Commercial Paper Funding Facility mon above the kingdom of heaven. In commercial aircraft. The fourth seems (CPFF) and the Temporary Liquidity his unintentionally revealing memoir, closest to the everyday ruse of pressing Guarantee Program (TLGP). It’s an “Jack: Straight from the Gut,” published one’s thumb on the scale. It concerns even finer irony that the government in 2001, Welch describes the rallying the mistimed recognition of revenue was succoring GE even as it was inves- round of his lieutenants to the news from the sales of GE’s locomotives. As tigating it. “[W]e believe,” comment that a $350 million hole had opened up the complaint says: the equity analysts at J.P. Morgan in a in the balance sheet of GE’s brokerage- “In the fourth quarters of 2002 and September 8 research report, “GE will house subsidiary, Kidder, Peabody. The 2003, GE improperly recorded rev- go down as the least publicized ‘too big news had hit on April 14, 1994, as the enue of $223 million and $158 mil- to fail’ story in the crisis.” Street awaited the release of GE’s first- lion, respectively, for locomotives The Morgan report, incidentally, quarter earnings.