Op-Ed: Markopolos vs General Electric — Collision imminent

Posted Aug 16, 2019 by Paul Wallis
Giant blue chip of yesteryear General Electric is fighting a credibility battle against a lot of very negative information and interpretations of finances. GE stringently denies any financial issues. It’s “Did!” “Didn’t”, in many ways.
A faded  painted logo sits over the entrance to a General Electric Co. facility in Medford
A faded, painted logo sits over the entrance to a General Electric Co. facility in Medford
Brian Snyder / Reuters
The dispute about the real financial state of GE has been brewing along rather violently in and outside the market. Harry Markopolos, the fraud specialist who brought down Bernie Madoff has been investigating the state of GE’s finances and has drawn a grim, not to say downright scary, verdict. Markopolos says that GE is “worse than Enron”. For a financial expert to comment like that is hardly trivial.
The allegations
It’s not reassuring, either. Markopolos alleges that recent major asset write-downs by GE and a projected $38 billion in future expenses point to what he alleges is massive fraud. Markopolos says that so many financial accounts adjustments for so much money over a few years point to serious problems, amounting to bankruptcy.
There are further allegations that GE cannot meet future financial requirements for payouts for liabilities. GE meanwhile put aside $15 billion to meet those obligations. The question is whether that’s enough, and some financial experts say it isn’t.
GE states with not-particularly-hidden fury that Markopolos is manipulating the market by spreading misleading information, and stands to profit by short-selling GE. (Short selling is buying stock on a contract at a lower price than at the time of purchase. You sell the stocks at the higher price, and pay for the contract at the lower prices. It’s a rather nasty allegation on GE’s part.)
The stock price and collateral damage
Meanwhile, the market is scratching whatever it is that markets scratch, partly in disbelief, and party in genuine, justifiable worry. A big corporate meltdown wouldn’t do the market index any good at all, and people could lose badly in any GE stock crash, notably major investors.
GE stock hasn’t been doing at all well. The stock is down from $30 in 2017 to $8 now. That’s a huge markdown of nearly 70%, and it’s apparently not getting better.
There are several facts to consider:
Markopolos is a very well-known financial expert. He has a lot to lose by making allegations which can’t be backed up by hard facts. Any suggestion of misleading information would be career suicide. No amount of money could undo the damage.
It doesn’t make a lot of sense that his comments would be based on some trivial few bucks from short selling. “Market manipulation” is a very serious charge, and could bring with it a jail term. Again, would a smart operator do that for a few extra dollars? If so, It’d be a very odd decision.
GE Is a long-term high profile US company. For generations, working for GE has been a major career achievement for those at the higher tiers. The company has been a staple investment for a very long time, too, and it receives a lot of scrutiny from investment experts. Dumb accountancy is not something GE is famous for.
Asset write-downs are standard practice when an asset is overvalued, to retain the integrity (and credibility) of asset valuations. Nobody likes writing down assets because it does have a negative impact on stock prices. On the other hand, failure to write down would be extremely bad practice and a form of implied fraud. So the argument is that GE’s write-downs are a type of fraud go cover debt and other asset values needs some proof behind it.
Making provisions for future liabilities is also standard practice. The question there is whether GE has put aside enough to manage costs, and that’s highly disputed. You could in fact say that the amount required to meet obligations, and whether appropriate cash will be available when required, has also not been well defined by GE or Markopolos.
A rather vicious bottom line
If Markopolos is prepared to take his allegations to the SEC, the situation will get very ugly, very quickly. GE flatly denies any financial irregularity at all. It has basically all but accused Markopolos of fabrication, if not in so many words. That allegation might wind up in court, too, on a very hotly contested basis.
If anything along the lines indicated hits the fan, the financial fallout, and the legal issues, will be truly murderous. A lot of numbers will have to be crunched, and as you can imagine, investors won’t be too thrilled. Either way, GE and Markopolos are now locked in to very hostile positions. There’s not much room for equivocation. Markopolos has made a statement. Backing down isn’t an option. GE has denied everything, with a startling level of venom. They can’t back down either. A collision is imminent. Don’t expect any punches to be pulled.