Me, Willi, etc what is your take on GE?

[Islandman]

Looks to me like investors are expecting bankruptcy or something close to it?

I knew GE Capital had problems but are they levereged highly enough to take down the entire company? That is a MASSIVE company with a lot of good businesses!

The stock is closing in on $6.00 today and dropping like a lead. Looks like another billion dollar bailout candidate in the making.

[Willi]

They have a very complicated hedge book. Not even they know how deep it runs.

Maybe TORY come to bump now.

Bottoms falling out everywhere. Nothing surprises anymore.

Years in the making. Unfortunately, most of my forecasts are coming true.

[Islandman]

Boy it looking more and more like these industrial companies were really glorified hedge funds with thier core business as a front to escape regulation.
Thats probably the only way they were able to make thier aggressive growth targets year after year.

GM auditors today say that they basically don't have a viable business, as if we didn't know that.

Looks like before this is over, the US govt will be owning a large percentage of the US industrial complex.

Yes what seemed impossible is now not only possible but getting closer to probable. The big one that I HOPE will not come to pass is the US govt unable to sell any more debt or even worse, defaulting. If that happens or is even close to happening then nothing else will really matter.

[Me]

The problem with GE is you simply don't know what is on their books.

They claim they intimately know the companies that they lend to and that the loans are securitized by things that they can take ownership of.

The problem is their loan reserve is only 1.4% of their total receivables, so if things really get bad what is the likelihood that they would be able to cover or even the liquidity of the things they repossess..

GE capital is also a HUGE player in the commercial real estate space, which hasn't even come close to the bottom that it is heading for.

Does a company that is in good shape take a 12% loan from buffet? That is high for a AAA company.

[Islandman]

Interesting, yes that sounds like a company with a ticking time bomb.

I guess the only people who think it is still a AAA company is the ratings agencies. I guess they will downgrade it after everybody sellout and it is a $1.00 stock.

It is sad to see what is happening to these corporate powerhouses though. We talking hundreds of thousands of employees and retirees and I am sure
many of them had a lot of thier retirement tied up in GE stock which was considered as safe as any out there. Suddenly 80% of the value gone.

[Willi]

I got slapped in my old company when I dared to suggest that they divest their US corp bonds and buy German bundesbonds (sovereign). US corps were paying 3.5% back then (2003/4) and the bundesbunds 5-5.5% in Euros.

Both the euro exchange rates and relative risk profiles have long since vindicated my position.

Not even a grudging apology mi get!

[Willi]

Food for thought...

Doctors and lawyers have their own crosses to bear and have a lot to answer for as well. Prescription drugs, correctly used, is the 4th leading cause of death in the US. Add Rx drug abuse to that and you may have number 1 or 2. As for lawyers...I think Jamaica provides a good example.


March 1, 2009

Harvard’s masters of the apocalypse
If his fellow Harvard MBAs are all so clever, how come so many are now in disgrace?

Philip Delves Broughton
If Robespierre were to ascend from hell and seek out today’s guillotine fodder, he might start with a list of those with three incriminating initials beside their names: MBA. The Masters of Business Administration, that swollen class of jargon-spewing, value-destroying financiers and consultants have done more than any other group of people to create the economic misery we find ourselves in.

From Royal Bank of Scotland to Merrill Lynch, from HBOS to Leh-man Brothers, the Masters of Disaster have their fingerprints on every recent financial fiasco.

I write as the holder of an MBA from Harvard Business School – once regarded as a golden ticket to riches, but these days more like scarlet letters of shame. We MBAs are haunted by the thought that the tag really stands for Mediocre But Arrogant, Mighty Big Attitude, Me Before Anyone and Management By Accident. For today’s purposes, perhaps it should be Masters of the Business Apocalypse.

Harvard Business School alumni include Stan O’Neal and John Thain, the last two heads of Merrill Lynch, plus Andy Hornby, former chief executive of HBOS, who graduated top of his class. And then of course, there’s George W Bush, Hank Paul-son, the former US Treasury secretary, and Christopher Cox, the former chairman of the Securities and Exchange Commission (SEC), a remarkable trinity who more than fulfilled the mission of their alma mater: “To educate leaders who make a difference in the world.”

It just wasn’t the difference the school had hoped for.

Business schools have shown a remarkable ability to miss the economic catastrophes unfolding before their eyes.

In the late 1990s, their faculties rushed to write paeans to Enron, the firm of the future, the new economic paradigm. The admiration was mutual: Enron was stuffed with Harvard Business School alumni, from Jeff Skilling, the chief executive, down. When Enron, rotten to the core, collapsed, the old case studies were thrust in a closet and removed from the syllabus, and new ones were promptly written about the ethical and accounting issues posed by Enron’s misadventures.

Much the same appears to have happened with Royal Bank of Scotland.

When I was a student at Harvard Business School, between 2004 and 2006, I recall a distinguished professor of organisational behaviour, Joel Podolny, telling us proudly of his work with Fred Goodwin at RBS. At the time, RBS looked like a corporate supermodel and Podolny was keen to trumpet his role in its transformation. A Harvard Business School case study of the firm entitled The Royal Bank of Scotland: Masters of Integration, written in 2003, began with a quote from the man we now know as Fred the Shred or the World’s Worst Banker: “Hard work, focus, discipline and concentrating on what our customers need. It’s quite a simple formula really, but we’ve just been very, very consistent with it.”

The authors of the case, two Harvard Business School professors, described the “new architecture” formed by RBS after its acquisition of NatWest, the clusters of customer-facing units, the successful “buy-in” by employees. Goodwin came across as a management master, saying: “A leader’s job is to create the conditions that enable people to believe, in their hearts and minds, in the value of what they are doing.”

Then just last December, Harvard Business School revised and republished another homage to RBS – The Royal Bank of Scotland Group: The Human Capital Strategy.

It is tragic to read now of all the effort put in by those under Goodwin, from “pulse surveys” to track employee performance to “the big thank you”, a website where managers could recognise individual excellence in customer service.

Every trendy business school idea was being implemented, it seemed, while what really mattered – the bank’s risk assessment, cash flow and capital structure – was going to hell. To be fair, neither Podolny nor the authors of the case studies were finance professors, but it’s still pretty shocking that a school that purports to teach general management should fail to see the gaping problems at a firm they studied in such depth.

Is there a pattern here? Go back to the 1980s, and you find that Harvard MBAs played a big enough role in the insider trading scandals that washed through Wall Street for a former chairman of the SEC to consider it a good move to donate millions of dollars for the teaching of ethics at the school.

Time after time, and scandal after scandal, it seems that a school that graduates just 900 students a year finds itself in the thick of it. Yet there is remarkably little contrition.

Last October, Harvard Business School celebrated its 100th birthday with a global summit in Boston. While Wall Street and Washington descended into an economic inferno, Jay Light, the dean of the school and a board member at the Black-stone private equity group, opened the festivities by shrugging off any responsibility.

“We all failed to understand how much [the financial system] had changed in the past 15 years or so, and how fragile it might be because of increased leverage, decreased transparency and decreased liquidity: three of the crucial things in the world of financial markets,” he said.

“We all failed to understand how that fragility could evidence itself in a frozen short-term credit system, something that hadn’t really happened since 1907. We also probably overestimated the ability of the political process to deal with the realities of what could happen if real trouble developed.

“What we have witnessed is a stunning and sobering failure of financial safeguards, of financial markets, of financial institutions and mostly of leadership at many levels. We will leave the talk of fixing the blame to others. That is not very interesting. But we must be involved in fact in fixing the problem.”

You would think after failing on so many levels, the school that provides more business leaders than any other might feel some remorse. Not in the least. It’s onwards and upwards, with the very people who blew apart the world’s financial plumbing now demanding to fix the leak.

You can draw up a list of the greatest entrepreneurs of recent history, from Larry Page and Sergey Brin of Google and Bill Gates of Microsoft, to Michael Dell, Richard Branson, Lak-shmi Mittal – and there’s not an MBA between them.

Yet the MBA industry continues to grow, and business schools provide vital income to academic institutions: 500,000 people around the world now graduate each year with an MBA, 150,000 of those in the United States, creating their own management class within global business.

Given the present chaos, should-n’t we be asking if business education is not just a waste of time, but actually damaging to our economic health?

If doctors or lawyers wreaked such havoc in their own professions, we would certainly reconsider what is being taught at medical and law schools.

During my time at the school, 50 students were chosen to participate in a detailed survey of their development. Scott Snook, the professor who ran it, reported that about a third of students were inclined to define right and wrong simply in terms of what everyone else was doing.

“They can’t really step back and take a critical view,” he said. “They’re totally defined by others and by the outcomes of what they’re doing.”

A group of people unable to see their actions in the broader context of the society they inhabit have no business being self-regulating. Yet in the financial services industry this is pretty much what they demanded and to a large extent got – with catastrophic consequences.

The happiest in my cohort, which graduated into the rosy economic conditions of 2006, are now certainly those who went off to do the unfashionable jobs: a friend who spurned Wall Street to join a Mid-western industrial firm, and now finds himself running the agricultural division of an Indian conglomerate; one who joined a foundation promoting entrepreneurship; one who went into Boston city government, another who moved to Russia to run a cinema chain.

However, these were the rarities: 42% of my class went into financial services and another 21% into consulting, both wretched sectors to be in today and for the foreseeable future.

Applications to business schools in America and Europe are broadly up, as people search for a safe haven from the recession. What are they thinking? Many MBA jobs will not be coming back. Students who stump up more than £60,000 for a two-year MBA can expect a long wait to make that back.

For those about to graduate from business school, these are grim times. Financial and consulting firms, which used to soak up two-thirds of the MBAs from top schools, have all but vanished from campuses. Suddenly jobs in government and at nonprofit organisations are in hot demand from students who used to consider them laughably underpaid.

A dose of modesty among MBAs and business schools is long overdue. But it’s not going to come from Harvard. Light, told his audience in October: “The need for leadership in the world today is at least as great as it has ever been. The need for what we do is at least as great as it has ever been.”

A bold claim to which many might say: please, spare us.

Philip Delves Broughton is the author of What They Teach You at Harvard Business School, published by Viking at £12.99. Copies can be ordered for £11.69, including postage, from The Sunday Times BooksFirst on 0845 271 2135

[Willi]

Ah dat mi tell some bigwig years ago, when they retorted.."R U telling me that GE Capital is not a sound debt issuer? They are rated AAA".

My reply was simply.."Do you KNOW what is in their hedge book?". GE Capital is a huge hedge fund.

[Plush]

This is why the market its what it is...Speculation. GE is a very solid company...I can tell you that for sure because I audited them for 3 years..yes, audited most of the business including Capital and Industrial. Tahey have risk like any other compant but they are much more sound than the failing banks you see out here. Did you guys listen to the CFO call today. Yes we have a REAL Estate business but this is all backed by tangible assets. You can have lossses but you won't loose all your money because at the end of the day you still have the properties. What differentiate us from a lot of other businesses is that we have a industrial arm that rakes in more than 15B in cashflows to service debt requirements in other areas of the company.
Make no mistake, GE will pounce bank..We are in almost everything, healtchare, aviation, water, energy, security..you name it. How aviation and Infrastructure business still have back orders that need to be filled.
As Isaid, if we don't do nay new business and continue to bleed the portfolio with small sales and collections, we will shrink the calpital balance sheet. We have taken down our leverage and will continue to do so with a shrinking balance sheet. Times are tough but I thinke GE is way above most of their competiors
Our Rserves are low yes, because we have a great underwriting business and we are not experiencing delinquencies that others are. Do remember that when GE was growing income at ~10% a year, it was companies like Merril, Goldma, Lehman etc who were reporting recording earnings...They were taking risks way above their heads. This was never GE's model and that's why they will be safer than most other companies

[Me]

You can defend you company all you want, but at the end of the day this is the reality.


"We recognize that we have made statements both about not raising equity and not cutting the dividend and we have had to backtrack on those," Mr. Sherin said. "We have to earn that trust back."


And lastly, unlike the banks, GE is not using mark to market, so we really do not know how bad the impact of some of their real estate exposure is going to be on the company. If you say well that gives them something tangible, just ask Fannie Mae about the cost problem they are having because of their increased inventory levels.

The regular business of the company is solid and has good long term value. GE Capital, people just don't know. Look forward to that session when they say they are going to really go deep into GE Capital and discuss it with the investors.

[Islandman]

Plush I think you painting a far too rosy picture of the company.

Nobody can deny that GE has some excellent business units that can survive any economic downturn, but the reality is that GE Capital was the money tree for GE. Taken by itself GE Capital would be insolvent if they were forced to liquidate thier assets today, and the rest of GE would have to cover the outstanding liabilities. Those real estate assets are worth a whole lot less than the GE balance sheet is valuing them at, that is a given.

And surely you can't expect anyone have much confidence in anything the CFO or CEO says? The CEO said a few months ago that the dividend was fine and he had to cut it drastically to keep some cash on the books. And what did the CEOs of Countrywide, Bear Stearns, Lehman , Citi say about thier situations before they all ended up bankrupt or savlaged by the government?

I expect GE to survive but the damage that has been done to the brand and the company balance sheet is significant and will not be repaired easily or quickly.

[Plush]

I do agree on your points. It's not rosy for any compnay in these times an dGE is no exception. Look at things like this. In a good market or bad, if most companies should be forced to liquidate, assets will be less than liabilities..that's a fact.
The question you should be asking is..whether GE will be in a position where it will be forced to liquidate.
If you take the Real Estate business, we have collections of at least 3B a year. We have Depreciation charge for over a billion a year. We might not make any money for the next few years but it doesn't mean that ww will be loosing money. As long as the business is not forced to liquidate, we can ride out the bad cycle by improving rent and interest collection, cutoff originations, dpreciate assets......at the end of this cyle, we will have a lower aset base and even if market values don't climb, we would have depreciated more than 10% of values...ready for when the market rebounds

Offcourse GE went back on their word about dividends but look at the positives in that. In means that we will be saving more than 9B a year in cash. that will save us from going to a very illiquid market where the cost of boring is always increasing.
Not realy a rosy picture Islandman but reality. It will be very difficult for the business for at least the next 2-3 years. I have a house in NY and I don't plan to sell it anytime now. Even though It might have lost about 20 grand in value..the fact that I still have a job and don't need to sell will help me to ride out this patch.....That's the same model that applies to GE. GE profits will fall comapred to prior years but they have enough good businesses to support the challenging ones and ride out the storm

[Plush]

Are you really comparing a risky Fanni mae with GE real Esatte..Fannie MAE should be compared to GE Money..which wrote off more than 3B in losses. GE Real Esate doesn't do Residential mortgage. All properties are commercial wither hotels, Offices, Retail etc. I tell you this...In both cases when GE went back on their word, it kept more cash in the company and kept them away from borrowing. that in my mind are good decisions.

[Plush]

By the way, per accounting rules, Real Estate property, Financing receivables and the like are not mark to market. It would make no sens eto mark these to market because they are not tradedWhy would you want to take a big loss on a property by marking it to market when you don't plan to sell it for the next 5 years? Imagine if we were allowed to do that and take tax benefits on that...the IRS would have a headache as they would ahve no tax revenues coming their way.
To be quite honest with you, the biigest risk in the portfolio is the loans on Real Esate that lost value cause if we foreclose we would need to mark those to market. However, once we continue to get payment from borrowers, which we are, we should be fine. Offcourse we will have alot of foreclosures this year but that will probably be less than 5 % of the business

[Me]

GE went back on their word. As a result investors have to doubt their credibility. Whether the decision was good, they can't be trusted.

The concept of the real estate foreclosure is still the same and Fannie Mae's multifamily is not much different from GE commercial. That is why so many commercial guys went there. Anyhow to the real point, once the property is foreclosed you are holding an illiquid asset that will have a holding cost and it is even worse with Commercial.