A Bigger Fraud Than Enron
The latest on General Electric... A Wall Street legend echoes our warnings... 'A bigger fraud than Enron'... Why GE could soon be downgraded to 'junk'...
It's one of the greatest financial tragedies of our lifetimes...
It's bigger than Bernie Madoff... Enron... or the collapse of Lehman Brothers.
And yet, most Americans still have no idea what actually happened.
Longtime Stansberry Research subscribers can probably guess we're referring to the massive, decadeslong fraud (and cover-up) at former market-darling General Electric (GE). Porter and his team have been warning readers about the company's huge problems and inevitable collapse since 2002.
This fraud should have come to light during the financial crisis...
GE was just days away from collapse when the U.S. government stepped in to guarantee its debts in November 2008.
However, while the government's actions saved GE from imminent failure, it didn't actually resolve any of its problems. Which meant, sooner or later, there would still be hell to pay. As Porter explained early last year in the January 19, 2018 Digest...
GE still holds billions in financial assets of dubious quality, financed by more than $130 billion in debt. Meanwhile, the company's cash return on assets is only 1%... But that's not the big problem. The big problem is what lies at the center of this company, hidden in those financial assets, is an enormous fraud.
The latest example is a $6.2 billion charge in its insurance unit... that will require another $15 billion in reserves over the next seven years. The charge and the demand for new reserves came from a Kansas Insurance Department investigation.
State insurance regulators require companies to post collateral to prove that they can fulfill their promises to pay. Essentially, Kansas called GE out for having preposterously little capital... and required it post another $15 billion in capital...
What else is hidden in those billions of dollars of financial assets the company holds?
And what are they really worth? Investors are going to want to know. And sooner or later, the government will have to come off the bench and start to do its job. GE can't hide the truth forever.
Of course, our stance on GE has never been a popular one...
The company was among the most beloved in America for decades.
We were among the first investment firms anywhere to point out these problems... and we received loads of angry letters and cancellation requests every time we did.
But even now – with GE shares trading near all-time lows of less than $9 per share – this story has received very little coverage on Wall Street.
Until last week, that is...
On Thursday, accounting expert Harry Markopolos issued a scathing report on GE. If Markopolos' name doesn't sound familiar, it should: He famously warned regulators about Bernie Madoff's massive Ponzi scheme years before anyone else.
In the report, Markopolos called GE "a bigger fraud than Enron." As financial news network CNBC reported...
The financial investigator, who was probing GE for an unidentified hedge fund, writes that after more than a year of research he has discovered "an Enronesque business approach that has left GE on the verge of insolvency."
Markopolos alleges that GE has a "long history" of accounting fraud, dating to as early as 1995, when it was run by Jack Welch.
"It's going to make this company probably file for bankruptcy," Markopolos told CNBC's "Squawk on the Street." "WorldCom and Enron lasted about four months... We'll see how GE does."
In particular, Markopolos pointed to problems in the same insurance unit cited by Kansas investigators last year.
According to his research, the company will need to raise reserves by at least another $18.5 billion, in addition to the $15 billion already announced. Markopolos also estimated the company's already lofty debt to equity ratio of 3-to-1 would soar to an astronomical 17-to-1 if it reported its financials accurately.
GE shares plunged more than 11% on the news on Thursday...
And the bond market now appears to be getting worried, too. GE's debt is officially rated BBB-plus, the lowest tier of investment grade. However, following Thursday's report, some of its debt is now trading well below that level.
According to MarketAxess data, GE's 5% 2049 bond is trading at 369 basis points ("bps") over U.S. Treasury debt. The average spread for BB debt – the highest-tier of non-investment grade debt – is just 270 bps today.
In other words, it appears the bond market now believes GE is at serious risk of a downgrade into "junk bond" territory.
As Porter asked last year: What else is hidden in those billions of dollars of financial assets the company holds? And what are they really worth?
We hope that investors find out soon. GE can't hide the truth forever.
New 52-week highs (as of 8/16/19): Axis Capital (AXS), General Mills (GIS), Coca-Cola (KO), Nestlé (NSRGY), Service Corporation International (SCI), AT&T (T), W.R. Berkley (WRB), and Aqua America (WTR).
A quiet weekend in the mailbag. As always, send your comments, questions, and concerns to feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
August 19, 2019