GE said the allegations are false and misleading. AP
Lex COMMENT
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 forflagging Bernie Madoff's Ponzi scheme, claims GE has a $38bn 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. Mr Markopolos's claims centre on two issues. First, GE has not fully accounted for losses related 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 $15bn 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 $7.4bn from the Baker Hughes disposal.
Mr Markopolos argues that the amounts in both cases are grossly understated. Covering all of the insurance loss would require $29bn in new reserves, including $18.5bn in cash immediately, according to his research. He also believes the Baker Hughes revaluation loss should be higher, at $9.1bn. While that latter claim looks more tenuous, he is right that GE lacks enough cash to cover these sums, if correct. However, GE could still borrow funds, given that its net debt to ebitda ratio of 2.5 times is not outlandishly high.
GE said the allegations are false and misleading. That Mr 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.