Thursday, August 15, 2019

The flat-out silly Markopolos GE report

GE is a deeply problematic company. It might not make it. And Harry Markopolos - the Madoff whistleblower - has put out a report on GE.

The report is I highly negative and I believe utterly misleading.

This report focuses on the Long Term Care business.

That business is

a) both having reserving problems and 
b) is for good reason the best performed Long Term Care business in the world.

Long Term Care - the business of insuring people against the need to go into a nursing home - has hurt everyone who touched it.

GE used to own Genworth - and when they spun it out they reinsured Genworth's policies. Those reinsurance contracts have bitten GE pretty hard. But they were - by the standard of Long Term Care policies really well underwritten.

I wrote a blog post a few years ago about how those policies were written. Read it and the ask yourself how valid is Markopolos's comparison with other companies.

Strangely and just to prove poor Harry's incompetence one of the companies he compares GE's business to is Genworth. This is bizarre. GE reinsured Genworth. They are the same policies.


But outside Long Term Care is where the report gets really silly. Here is a slide comparing GE's industrial margins to Madoff returns:

He states GE Industrial Margin of 14.7 percent is "too good to be true".

Let's give him some comparisons:

United Technologies13.3%
Emerson Electric16.4%
Illinois Toolworks24.3%
Roper Technologies27.4%
Rockwell Automation20.4%

I guess all of these are "too good to be true" too. Indeed the entire high-end of US manufacturing is worse than Madoff if you believe Mr Markopolis.


I think the alternative is more likely. Say what you will, GE remains the unequivocal leader in medical imaging technology and the unequivocal leader in jet engines. In both these there are very few competitors and it would be near impossible to eat into GE's lead.

My guess - and it is a guess - that over time GE's industrial margin goes back towards the upper-end of the above-mentioned comparables.

Harry's report is silly. The market should ignore it.


For disclosure: we are long a little bit of GE with the emphasis on "small". GE is a problematic company and a zero is a possibility. However the Markopolis report is not an accurate guide to GE's problems.


r said...

I haven't been able to find the report anywhere. Is this something you are able to share?

John Hempton said... if you insist...

Anonymous said...

Nice try but your defense is weak and wrong. Markopolis is probably the best accounting fraud examiner in the business. Spent 7 months with a group focused on 1 company. And the market brushed it off at the open. If i had a nickel for every analyst and commentator that said "what could he possibly know that all of us professionals covering GE missed?". I'm a trader and investor for 27 years and I shorted on the open and doubled on weakness. I'd love to hear what Nick Heymann and Steve Tusa have to say about the silly report. They do some good research and know GE as well as anyone.GE is not what it was. Its been gutted. I was short a few years ago after they did the big financial transaction and I think Peltz or another private equity guy was cheerleading the transaction. Extracted cash, and added off balance sheet transactions (liabilities). They did a bunch of financial transactions designed to make things look better TODAY! Ask yourself how GE was percieved at the time of that big financial transaction and look at it today. It was in the high 20's and a lot of "smart" people loved it. Most of the issues that Markopolis cites were happening in that period and no one saw it! By the way, I was a broker at a major wire house when a female nat gas analyst in houston started talking about Enron's risky financial transactions when Enron was $19 and finally figured out that it would go to zero when it broke $3. That was a huge call. And so is this my friend! It reminds me of how dumbly the street brushed BA's problems off after the 2nd crash. Jack Welch and Jeff immelt made a fortune on bullshit numbers. Sad! God help the pensioners!

Anonymous said...

Wouldn't you say the BHGE accounting part is pretty weak? I mean, we're to believe that GE's army of accountants have been getting that fairly basic accounting decision wrong for years and the SEC has had no issue with it. It's also GE's most prominent (& public) holding. Come on.

r said...

Yes, that report was a waste of time...

exuberance said...

Speaking of a Modest Proposal:

Nick said...

I haven't read the forensic accounting elements for which Harry is genuinely expert, but comparing margins across industries is MBA 101 idiocy.
1. Why on earth would Madoff's fake margins be the benchmark against which ALL companies should be compared?
2. Those are Madoff's RETURNS not margins; Harry hasn't even considered the true EBIT margin, ROE or ROIC of the actual business Madoff was running.
3. Different industries have different margins ONLY AN ABSOLUTE MORON doesn't know that.

Anonymous said...

Just seen this on google and had to chip in... This is by far the best accounting analysis I have ever come across, and likely will ever come across. It is absolute ownage and there is nobody in this industry who read the report and actually believes GE's debt isn't junked within weeks... Just read the first 10 pages, and if you can't understand what is coming, you need to seriously re-evaluate why you speculate finance

GE got caught in 09 for 3.4 Billion in Accounting Fraud, only paid a 50 million dollar fine, nobody ever lost a job... Welch was a cancer, but Two Jet just destroyed what ever was left of it, Culp inherited a real shitty hand... The kicker, Two-Jet did 52 Billion of buybacks and 54 Billion in Dividends from 12-18, GE's earnings were 15 Billion from 12-18! Gravy bonus train baby, and then engaged in serious fraud manipulation to hide losses which would affect it's leverage ratio and it's credit status, it's real leverage ratio is 17:1 all in writing just read the report your jaw will drop... Music stops, bowls over

John Hempton said...

it was the incompetence of that paper I was commenting on...

Anonymous said...

Only relevant 'reveal' in the report is that GE might have to add another 18bn to its LTC reserves. Any decent investor already suspected that more reserves may be required, so not exactly something one should have wasted 7 months on. We already knew there was some wrong stuff going on in GE LTC and power (read the lawsuits! - they are public). I guess pulling reported earnings from future into present is going on at lots of companies. Dont know what's the fine line between a fudge and a fraud! GE could have gone bankrupt without Mr Markopolos. If those scenarios come to pass, now he can thump his chest!

Unknown said...

The improper accounting of GE’s Baker-Hughes investment seems too blatant of a violation to have evaded the regulators. I would like a well-reasoned defense of this by GE or someone who is qualified to opine on this detail.

I would also like to know what hempton thinks of GE using different formats to present their financial results, which Mark alleges, hampers comparability across time. Is this a valid accusation? It would seem so to me but perhaps there is a reason.

I think Mark’s comparison of Maddoff’s “margins” (which were returns, not margins) to GE’s industrial division margins was ridiculous but does that really disqualify the other conclusions embedded in the report?

I agree with hempton’s sentiment here but I Don’t know how Mark is wrong about the size of the increased reserves & their impact on covenants/debt ratings. Company definitely has certain unbelievable product lines but the liabilities Mark focuses on seem too significant to overcome without Ch11.

Perhaps someone could address these points

fadewid said...

John, The most simplistic and perhaps most damning thing I heard Markopolos say is that GE does not even report a
current ratio in its financials. Could there be a reason other than they are broke? (Not a rhetorical question)


Dan Widdis

fadewid said...

John, Markopolos says that GE does not provide a Current Ratio in its financials. Could there be a
reason other than GE being insolvent? (Not a rhetorical question)


Dan Widdis

Unknown said...

Money could care less who is silly or who's fault it is. Bronte Capital do not quit your day job, and forget about feelings. GE is tanking. No need to agree or disagree just fill out the put or short order and go on.

Ben said...

Good Afternoon
John, congrats, you got a link to your Blog at the bottom of an FT article (It's paywalled)

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