GE has $59b gap in accounts, says expert
Control your own destiny or someone else will. So said Jack Welch, erstwhile leader of General Electric.
Unfortunately for GE that someone may have arrived. Harry Markopolos, an accounting expert best known for flagging Bernie Madoff’s Ponzi scheme, claims GE has a US$38 billion ($59.1b) gap in its accounts. This week he accused it of running an accounting fraud that is “bigger than Enron and WorldCom combined”. He makes some good points, though none is new.
For years, analysts have bemoaned the way the struggling industrial conglomerate presents its accounts — which at best were confusing and, at worst, the subject of US regulatory probes. Markopolos’s claims centre on two issues. First, GE
Harry Markopolos argues that the amounts in both cases are grossly understated.
has not fully accounted for losses tied to its legacy US healthcare insurance liabilities. In addition, GE has yet properly to value losses related to selling down a holding in oilfield services provider Baker Hughes.
GE said last year it would need to pay an additional US$15b to cover legacy liabilities related to the insurance businesses it sold in 2004 and 2006. Worse, the US Securities and Exchange Commission began an investigation into this sudden charge. More recently, GE estimated a potential revaluation loss of about US$7.4b from the Baker Hughes disposal.
Markopolos argues that the amounts in both cases are grossly understated. Covering all of the insurance loss would require US$29b in new reserves, including US$18.5b in cash immediately, his research shows. He also believes that revaluation loss should be higher, at US$9.1b. While that claim looks more tenuous, he is right GE lacks cash to cover these sums, if correct. But GE could still borrow, given its net debt to ebitda ratio of 2.5 times is not hugely high.
GE said the allegations are false and misleading. That Markopolos is working with an unnamed hedge fund and would profit from GE’s woes will raise eyebrows. That GE has problems is not in doubt. Whether it is on the path towards bankruptcy is another matter.