NEW YORKNEW YORK (Reuters Breakingviews) - General Electric is getting a harsh lesson in the cost of credibility. A man who warned about Bernie Madoff’s Ponzi scheme claims the conglomerate is hiding $38 billion in losses with false accounting. The company run by Larry Culp strongly denies it, but its history of opaque reports and belated write-offs put it on weak ground. The stock’s more than 10% drop implies investors give the claims only partial credence – for now.
No company would welcome the attention of Harry Markopolos. The forensic accountant tried to warn the U.S. Securities and Exchange Commission about Madoff’s theft years before it came crashing down in December 2008. GE will find the scrutiny particularly uncomfortable.
Take the long-term care reinsurance business that GE’s financial-services arm exited over a decade ago. The company took a $6.2 billion charge in 2017 to bolster insurance reserves because people are living longer and healthcare costs are rising. Markopolos claims GE should set aside another $29 billion, which the company disputes. It could take years to sort out the truth. But the SEC is investigating GE’s reserving policies and the $22 billion write-down of its power business earlier this year, which makes dismissing the whistle-blower’s claims difficult.
GE also rebutted Markopolos’s contention that it should have taken an additional $9.1 billion hit when it sold a 12% stake in oil-services outfit Baker Hughes last November. That’s not required, GE notes, because it remains the majority owner - just. But the company disclosed last month that any new sales would crystallize a $7.4 billion loss. Baker Hughes shares have since fallen nearly 17%, potentially magnifying the damage.
Culp has been working feverishly to revive GE since taking over last October, but unwinding decades of bad management and convoluted accounting is a job of years, not quarters. The company massaged earnings under former Chief Executive Jack Welch in the 1980s and ‘90s to consistently exceed analysts’ estimates. Successor Jeff Immelt made disastrous acquisitions like France’s Alstom.
A thin silver lining is that the $10 billion in value wiped out as of Thursday afternoon equates to barely a quarter of the pain Markopolos reckons may yet lie in store, implying investors aren’t buying the whole story. But until Culp can make a clean break from the past, the company will remain vulnerable to skeptics like him and the short-sellers behind them.