BAC, GE, IBM, GOOG

We'll start with the lousy earnings news and work our way up:

• Bank of America posted a net loss of $1 billion or 26 cents a share, compared with a profit of $1.18 billion a year ago. The loss was mostly due to $2.6 billion in write-downs from an improvement in credit spreads and a $402 million charge from a payment to the US government to get out of an asset-guarantee deal tied to the incredibly stupid and expensive purchase of Merrill Lynch. To add insult to injury, CEO Ken Lewis, who is stepping down at the end of the year, will receive no comp for this year and will be asked to refund the $1 million in salary he has collected for the year. This should be fairly easy to do as he is slated to receive around $69 million or so in retirement benefits.
• GE, the finance firm that likes to pretend it is an industrial conglomerate, posted a third-quarter profit of $2.49 billion, or 23 cents a share, down from $4.31 billion or 43 cents a share. GE Capital's profits dropped by 87%, and will likely weigh on GE's earnings for some time, regardless of any improvements in the industrial part of the business. This is because GE Capital doesn't have to mark-to-market so its assets will just bleed to death rather than take large hits. But luckily, the company had the pleasure of issuing government guaranteed debt through the crisis to stave off a liquidity problem. The industrial side of the company seems to be doing well with an increase of 3% in its backlog of orders for big-ticket equipment, maintenance and other services.
• IBM posted fairly decent numbers, although the market seemed not to like them enough to sustain the recent rally in the stock. Profits were up 14% on an increase in margins on a 6.9% decline in revenue. IBM also raised its full year guidance for next next year to at least $9.85 a share from its previous forecast of $9.70.
• Google continues to impress. The highly profitable tech outfit actually had an increase in revenues of 7% from the year earlier quarter to $5.94 billion. Revenues were up 8% sequentially as well. Profits grew even faster as net income rose 27% to $1.64 billion. Google's stock is the only one up this morning after its earnings results.

Regulators At Work: SEC Fines BAC and GE

In an effort to appear relevant and tough, the SEC extracted fines out of two government-backed financial firms for prior transgressions. First, Bank of America settled its "I know we said we didn't know about Merrill's end-of-year bonus payouts, but we knew" dispute with the agency and forked over $33 million. The fine is for misleading investors when it issued a proxy statement for the acquisition stating that Merrill had agreed not to pay year-end performance bonuses to executives without Bank of America's consent. However, Bank of America had already agreed to allow the firm to pay up to $5.8 billion in compensation. B of A paid the fine. Problem solved. Right? If you can ignore the pesky fact that the government wrote a check for $3.3 billion to Merrill's employees after sinking the firm with a $27 billion loss, then we really can put the matter behind us. Besides, B of A hasn't paid back the TARP yet, so technically the Treasury is just giving the SEC $33 million. This is effective and efficient retroactive regulation.

Next up GE shelled out $50 million to settle civil accounting fraud charges that it used improper accounting methods on four occasions to boost earnings in 2002 and 2003. Once again, the company paid the fine, put the matter to rest. GE seems to have a long history of accounting shenanigans going all the way back to Jack Welch's days, when the company used to mysteriously beat earnings every single quarter and post smooth results quarter after quarter even if it meant under-reserving insurance reserves every once in awhile. What is interesting about this particular fine that was levied, oh approximately seven years after the accounting fraud was committed is that accounting problems occurred during the last recession. So when are we going to get the fines for 2008-2009 shenanigans? Is anyone combing through GE's notoriously complex and opaque financials TODAY? Dennis Koslowski and Bernie Ebber's ears must be steaming from their jail cells.

Meanwhile, in real time accounting fraud action, Huron Consulting, an accounting firm that sprung from the ashes of those Enron-document-shredding accountants at Arthur Andersen had to withdraw its 2009 earnings guidance, lower its outlook, and restate three years worth of financial results. The folks at Huron were experts in forensic accounting, a practice that looks to root out the type of accounting fraud that they have apparently just committed. Maybe they can hire themselves and pay themselves big fees to boost their earnings for 2010? But, how would one account for that? The Chairman and CEO resigned, along with the finance chief and chief accounting officer. While this is somewhat troubling news, rest assured the company stated that "no severance expenses were incurred by the company as a result of these management changes." No word yet on when the SEC plans to get involved in this accounting debacle. Probably 2015.

B of A, Citi, GE Earnings

Let's go in alphabetical order, shall we? Bank of America posted income of $3.22 billion or 33 cents a share, down from $3.41 billion , or 72 cents a share. Notice how earnings were down slightly, yet earnings per share were cut in half? That's dilution working for you. It's what happens when you have 64% more shares outstanding due to a capital-raising frenzy. Revenue jumped 61% to $32.77 billion. No indication yet where the increase in revenues is coming from. Actual growth? Merrill Lynch? Countrywide? I presume we'll get a few more details later, but the company did say that results were driven by strong revenues in the wholesale capital markets business and home loans, with most of the activity in mortgages coming from refinance activity. Revenues are up, which I'll take at face value as much better than being down. However, credit-loss provisions more than doubled from a year earlier, while the net charge-off rate surged to 3.64% from 1.67% a year ago and 2.85% in the first quarter. Credit-card managed losses increased to a whopping 11.7% from 5.96% a year ago, and total nonperforming assets rose to 3.31% from 1.13% in the prior year and 2.64% last quarter. Bank of America is pedaling hard against the rising heap of losses in its poorly performing loan portfolio. The question is: Can robust capital markets activity continue to counteract the losses in its loan portfolio until the economy turns?

Moving right along, Citigroup posted a record $4.28 billion in profits! Who needs government help with profits like that? Well, the results were distorted with a little help from a $6.7 billion gain related to the combination of its Smith Barney brokerage operations with those of Morgan Stanley. Conveniently, Citigroup didn't provide results excluding the gain, so I'll have to do my own math. By my calculations $4.28 billion minus $6.7 billions equals a loss of around $2.4 billion. Now this is probably not the right way to do the calculation, but you know, I don't think it would be inappropriate for the damn company to break out its operating results so that analysts and investors can see what the real story is. Particularly when you're on government life support and everyone and their mother is trying to figure out if you're going to survive another quarter.

Meanwhile, GE, that finance company that calls itself an industrial bellwether, reported a 47% drop in second-quarter earnings Friday. GE posted income of $2.67 billion or 24 cents a share, down from $5.07 billion or 51 cents a share a year earlier. Revenue fell 17% to $39.08 billion amid a 29% drop at GE Capital. Analysts expected earnings of 23 cents on revenue of $42.16 billion so I'll call these results worse than expected. GE Capital's profits plummeted 80%, but really the only reason GE Capital is even posting profits is that it isn't required to mark its assets to market. More details on the performance of its loan portfolio will be extremely enlightening. Although the energy-infrastructure business only had a 1% drop in revenue, the consumer and industrial operations saw revenues and profits drop 20%.

GE's stock is down around 4% and seems to be the biggest disappointment to investors. Yesterday's lackluster results from Google, 5% revenue growth for a company that is used to 30% or more, is also weighing on the market. IBM's respectable quarter, a 12% jump in second-quarter profit on a 13% decline in revenues coupled with raised guidance for the forthcoming year, hasn't done much to propel the market higher. If you were hoping for an exciting expiration Friday, you will likely be sorely disappointed.

Expiration Earnings - GOOG, GE, C

As if it weren’t enough fun trading equity options during a financial crisis so great that the government had to get in the mix, a few companies like to make things interesting by reporting earnings right before expiration Friday.

· GE reported first quarter profit of $2.82 billion, down from $4.35 billion a year ago. Revenue declined 9% to $38.4 billion. Decent results from GE’s industrial operations, with revenues that declined only 1% helped offset problems with GE Capital (profits down 58%), NBC Universal (profits down 45%) and consumer businesses (profits down 75%.) Although the stock is up on earnings that were “better than expected”, the real story will be revealed when the 10-Q is released.
· Citigroup posted earnings instead of losses for the first time in 18 months. The beleaguered bank, the beneficiary of a “way too big to fail” designation by the government, made $1.59 billion in the first quarter. Of course, $2.5 billion of that profit was due to a decline in the value of the bank’s own debt. More juicy details to come about the true state of affairs after the results of the stress tests and its balance sheet are released in May.
· Meanwhile, in Techland, Google reported actual earnings, real earnings, old- school non-accounting shenanigan style earnings of $1.42 billion, an 8.9% increase from the prior year’s quarter. Revenue rose 6.2% year over year to $5.51 billion, but declined sequentially by 3%. The tech giant is obviously not immune to the slowdown in ad spending, but in an economic environment like the one we’re in, these results were quite solid.

Irony of all ironies, both GE and Citi are trading higher in pre-market trading, while Google is trading lower, having given up all its gains from yesterday’s after hours session. But that’s what makes this market so much fun lately, “better than horrible” = “great!” while “solidly profitable” = “yawn.”

Should GE Mark to Market?

One of the highlights on the economic calendar for the week is GE's investor update tomorrow.  The conglomerate has been battling (much-needed) criticism over its opaque balance sheet, that is packed to the gills with assets.  Certainly, in a bull market, investors are not likely to question whether asset valuations are representative of market prices.  But in an an economic environment where asset values are declining, a leveraged finance firm needs to provide reassurances to its investors that its valuations reflect reality.  This is particularly true if the firm used to rely on selling assets out of its finance arm into a rising market to boost earnings.  

GE has a $34 billion commercial real estate investment portfolio that it does not mark to market.  According to accounting rules, the company doesn't have to mark to market because it is in a hold-to-maturity portfolio and 80% of the properties are not secured by mortgages.  This is a fair point, and I would accept this explanation if it weren't for the fact that GE was flipping properties with the best of them during the commercial real estate boom to boost earnings.  According to Real Capital Analytics, in 2007 GE sold $7 billion of real estate world-wide but acquired $16.6 billion in the same year.  Since 2007 was the high, GE was able to conveniently book significant profits on the sales, while simultaneously paying too much to double down on real estate.  If GE were just really bullish on commercial real estate and genuinely planned to hold to maturity, it would've had no reason to sell any properties in 2007.  Clearly, this was an earnings massaging maneuver that is no longer available to the company.  So, yeah, GE will definitely be holding to maturity now (i.e. no buyers).  The properties that GE purchased in 2007 are down at least 30%, assuming anything ever trades in the commercial real estate market again on a valuation basis.  The Wall Street Journal is filled with examples of the shocking rise in vacancies in several of the large buildings that GE purchased at the peak.  Apparently, GE has chosen to estimate that the value of its commercial real estate holdings will fall this year by 1.5%.  This seems incredibly hard to believe.  In fact, once I read this line, I rolled around on the floor laughing for a bit.  The folks at GE don't seem to understand that even if they don't think they need to mark to market, the market will do it for them.  But I give them major props for finally offering transparency to their investors.      

Unemployment Hits 8.1%

The jobs report was as dreadful as expected by those who can still stand to look at economic headlines.  The economy lost 651,000 jobs and the unemployment rate leapt to 8.1%.  Revisions for the prior two months showed losses of an additional 161,000 positions bringing the total number of jobs lost since the recessions began in December 2007 to 4.4 million.  The jobs report is sobering and yet really makes you want to have a drink all at the same time.

Following the lead of other financial institutions looking to retrench, Wells Fargo slashed its dividend in order to save $5 billion annually.  Clearly there is no longer a stigma related to reducing the dividend as investors have begun to prefer the idea of their banking institution actually remaining a going concern over a quarterly dividend check.  JP Morgan and GE made the same announcement recently and I view these actions as prudent, but necessary, if an institution is going to survive the brutal downturn.

Finally, in the "investment bank that needs to finally go away" category, Merrill Lynch is once again in the headlines.  The bank informed regulators that it had discovered discrepancies in certain trading positions.  Conveniently, the losses, which occurred last year, weren't discovered until after Bank of America purchased the investment bank and allowed it to pay out accelerated bonuses.  The details are sketchy so far, but apparently a London currency trader who had recorded a trading profit of $120 million for the fourth quarter, may instead have lost a "large amount."  The Bloomberg story doesn't specify whether we are talking Nick Leeson-large or Jerome Kerviel-large.  At least we have some insight into how Merrill managed to punt $15 billion in the fourth quarter.     

The Good, The Bad and The Ugly

First some reasonably good headline news:

• The ECB cut its interest rates by 50 basis points to 1.5%.  The Bank of England also cut rates to nearly zero and said it will purchase $211 billion in government and corporate bonds.
• Wal-Mart's same-store sales soared by 5.1% last month, besting estimates.  At least consumers are buying something even if it is just bread, milk, bars of gold and guns.
• Jobless claims actually fell by 31,000 to 639,000, although the four-week average rose 2,000 to 641,750.  Continuing claims also slid 14,000 to 5,106,000, which is still very high, but down is better than up.  Brace yourselves for tomorrow's employment report.
• Andrew Cuomo has subpoenaed several Merrill executives who sucked more than $10 million a piece out of the dead carcass before it was handed over to sink Bank of America.  

Some Bad News:

• Barclay's is probably not too thrilled about being asked by Lehman's liquidators to explain what it did with $3.3 billion that was earmarked to pay bonuses and other liabilities when Barclays acquired Lehman's North American investment bank.  Apparently, not all of the money was paid out and the liquidators at Alvarez and Marsal are doing trying their best to recover as much as they can for Lehman's creditors.
• Here's a shocker:  GM's auditors say there is substantial doubt about the automaker's ability to remain a going concern.  
• The difference between the values of loans being carried on the books of our largest banks and the actual fair value of those loans is rather large.  In some cases, if banks were required to mark their loans to market, shareholder's equity would drop below zero.  This gets at the heart of the whole solvency issue of our banks which continues to plague the bank stocks.

And the ugly:

• GE's stock continues its steep decline as the confidence crisis continues.  The credit default swaps on the company's finance arm are trading at highly distressed levels.  Regular readers know that I have been warning about GE's balance sheet since I launched this blog a year ago, in pieces such as "What's Behind the Curtain at GE?" and most recently "Why is GE Still Paying a Dividend?" (not anymore.)  The company relied too much on short-term debt to finance a huge investment portfolio of god knows what (also labeled as "other" on its balance sheet.)  I suppose this kind of accounting used to fly a year ago, but no more.  Investors have woken up, demanded clarity, and want answers.  GE's protestations about everything being peachy are not being met with enthusiasm any longer. 

Why is GE Still Paying a Dividend?

GE reaffirmed plans to maintain its 31-cents-per-share through the end of 2009.  The company went on to say that "GE expects industrial cash flow to be greater than the amount needed to fund the dividend in 2009."  Here's a suggestion:  Maybe use all of that industrial cash flow to pay off some of your debt?  Because aren't you paying the FDIC a fee to guarantee $139 billion of GE Capital's debt?  Wouldn't it be prudent to instead reduce some of the $65 billion or so in commercial paper that you can't hock to any investors except for the Fed?  Maybe save some of that cash flow to help pay for the 10% dividend you handed to Warren Buffett for his $3 billion "confidence" investment?  Perhaps preserve some capital to increase loss reserves on GE Capital's loan portfolio that is certain to get the stuffing beaten out of it in a nasty recession?  I don't know.  Call me crazy, but GE is not in any position to be paying a dividend right now.  I'll give Mr. Immelt small bonus points for halting the stock buyback program earlier this year, but continuing with a dividend payment is ridiculous for a finance firm that has meaningful risk tied to the mortgage market and depends on the bond market for financing.

I have written several posts about the lack of transparency of GE's balance sheet and the inherent risks lying in its GE Capital finance unit.  Given the drubbing the stock has taken, investors are waking up to the reality that GE really is a finance firm with an attached industrial conglomerate.  I know that GE doesn't want to anger its loyal shareholders, but I'm fairly certain that any shareholder with half a brain will understand.

   

Buffett Invests in GE Preferred

Warren Buffett has struck a deal for GE preferred with terms very similar to his investment in Goldman Sachs. Buffett will invest $3 billion in return for an annual 10% dividend and warrants to purchase an additional $3 billion in common at $22.25. The preferred is callable after three years at a 10% premium. Once again Mr. Buffett has received extremely favorable terms for his investment. The warrants are worth at least $1 billion and Mr. Buffett is getting them for free. GE, who has adamantly denied having liquidity problems and a need for new capital, is also planning to issue an additional $12 billion in common stock. Naturally, it's wise to conduct any dilutive capital raising before the SEC short-sale ban expires. Should Buffett's investment be viewed as a sign of confidence? To a certain extent, yes, but that doesn't mean purchasing the common stock is such a great idea. Personally, I'd like a 10% dividend and a free option to go with any investment, so I'll be sitting this round out. You can read further thoughts on GE below.

GE's Risks Rising to the Surface

An analyst at Deutsche just figured out that GE is mostly a finance firm and lowered his estimates for the bellweather conglomerate. Of course this downgrade only came three days after the company itself cut its own earnings estimates, froze its dividend and stopped its stock buyback program. I'm not really sure what finally clued-in the crack analyst at Deutsche. Was it the $200 billion in short-term debt that GE relies on to fund its operations? Maybe the complete and total meltdown in the commercial paper market, where GE borrows about $65 billion? Perhaps the fact that the CDS on GE Capital has blown out to 700? I'm sure the analyst will claim that there's no way anyone could've seen this unprecedented disruption in the capital markets coming. Really? I'd like to offer up exhibit A as evidence that many Wall Street analysts still suck at forecasting and identifying risk in a company: a story I wrote in June entitled "What's behind the curtain at GE?" In this post, I pointed out the opacity of GE's balance sheet and how I would never invest in a company that had billions of assets labeled as "other" on its balance sheet. Furthermore, I noted that GE depended on significant amounts of short-term debt to finance its operations and that it could face liquidity problems if disruptions continued in the capital markets.
So here we sit, three months later, the Fed is pumping crazy amounts of money into the money markets to no avail. Money market investors refuse to buy commercial paper unless it is from a AAA credit, which means you'd darn well better keep that AAA rating or you'll have to go to Congress to beg for your own bailout loan like GM and Ford. The Senate will vote on a $700 billion bailout package that may indirectly help alleviate some stress in the money market, but does not guaranttee immediate relief. Finally you have a CFO who swore on September 25th that GE will not have to draw down its bank lines of credit. That was a major tactical error. The CFO should've drawn down that credit line because now he just sounds like every other CFO that has claimed they don't have liquidity problems that has since failed. The minute GE has to touch that credit line, it implies there are big problems at the firm. And that is how liquidity problems can become fatal.

Equity Investors Cheer Bailout Plan?

Financial headlines today were disappointing enough that a rational investor would expect the stock market to be lower.  After all:

• Durable goods fell 4.5%, more than the 1.3% expected by economists.
• Jobless claims soared 32,000 last week.
• New home sales were atrocious, down 11.5% to 460,000, much worse than expected.
• GE cut its forecast and suspended its stock buyback.
• The credit markets are still in a complete state of seizure, with banks terrified to lend to anyone other than the Fed.
  

However, equity markets are up, supposedly cheered by the fact that the $700 billion bailout package will most likely pass.  President Bush urged lawmakers to pass the bailout plan claiming that the entire "economy is in danger" and the only way to rescue the economy is to invade the country and liberate its citizens.  Oh, sorry, I was reading Mr. Bush's last speech where he claimed that the US was in danger and we must act quickly to enact his administration's plan or face grave consequences.  

Although it's true that the US economy faces a rough road to escape from the debilitating cycle of banks who cannot lend because they are suffering under the weight of losses on underperforming assets, what the bailout plan is proposing is a reallocation of those losses.  If we let the market sort out this mess on its own, losses from the mortgage mess will be allocated to equity investors in insolvent banks first, followed by the preferred holders, and finishing with the bondholders.  Financial services professionals will suffer job losses and huge curtailments in their incomes.  Finally, taxpayers will pay when the FDIC has to be recapitalized to cover all of the banking failures and liquidations that will ensue.  Frankly, I prefer this scenario.  Why?  Because it allocates the losses in the same manner in which it allocated the gains on the way up.  This is how our capital markets were conceived and I find it very disturbing that our administration seeks to change our core beliefs in capitalism.  It threatens the integrity of the capital markets as it benefits those who caused most of the problems to begin with.  Asking the US taxpayer to pay for lending mistakes made by people who were paid exorbitant sums of money, and to bailout stock market investors from lousy investment decisions despite the fact that they should know they are taking risk when they buy stocks, is flat-out unfair regardless of how much it is going to "boost the economy".  We might as well spend $700 billion to buy all the foreclosed houses and give every homeless person in America a free place to live.  It's the same thing.  Sure it would boost the economy, as the homeless would now need to buy furniture and that would be great for Home Depot.  It would also be rewarding a group of people, who many would argue are on the street because they abuse drugs or are too lazy to get a job, at the expense of ordinary hard working citizens.  Because the Bush administration is proposing the idea, it happens to benefit the banks and not the homeless.  But the market should make the decision, not the government. 

Offering to buy securities from insolvent banks at potentially inflated prices, (Mr. Bernanke thinks they are "fire-sale" prices, but he really has no idea what they are worth) is a transference of risk of future losses from equity holders to the US taxpayer.  Furthermore, it is endangering the US dollar as a reserve currency for the world by asking the world to lend it yet another $700 billion dollars.  Although the bailout plan may provide a brief boost to the banking sector, it may easily cause a currency crisis in the US similar to what emerging markets have experienced in the past.  In the face of all of this, it seems absurd that stocks are rallying.  However, since Chris Cox says you can't short 'em, everyone who understands the dire consequences of this extraordinary action by our government is not allowed to express their views by shorting stocks.  Most of the people who understand what is happening work in the bond market and are cowering under their desks because they can't find anyone in the formerly friendly money market to lend them money for more than a week at ANY rate above libor.  The credit markets are still panicked despite the fact that we are close to a $700 billion deal, yet the equity market is up nearly 2%.  I've seen some crazy markets in my time, but nothing, absolutely nothing comes close to the past two weeks.    

What's Behind the Curtain at GE?

The market is bouncing nicely on this Friday the 13th, after weeks of disappointing news.  Shareholders of GE, however, are wondering why their stock isn't joining the party.  Investors' concerns may be exacerbated by the fact that financials are experiencing a fairly decent uptick after weeks of bloodletting.  As I mentioned before in previous posts about GE, the supposed bellweather of the economy is actually a financial firm masquerading as a industrial conglomerate.  How do I dare to say such blasphemy?  As evidence, I offer up GE's balance sheet:  $683 billion out of $838 billion in GE's total assets reside in GE Capital.

The recent volatility in GE's shares has been attributed to rumors about GE Capital needing to secure external funding in order to maintain its AAA rating, a possibility that Immelt adamantly denied.

Is it conceivable that weakness at GE Capital could potentially force GE to seek external funding? If you consider GE to be a financial firm, and take a look at the capital raising frenzy among other financials, it's hard to ignore the question.  I have mentioned in the past that I was concerned about the lack of transparency offered in GE's financials, specifically related to assets on the balance sheet labeled as "other" without any further description.  GE Capital's most recent 10-Q provides virtually no transparency into the details of its investment holdings.  It only clearly states that GE Capital holds $683 billion in assets and $624 billion in liabilities, $198 billion of which is short term financing.  Could GE potentially have a funding issue?  Sure, if investors started to question the financial performance of GE Capital's underlying assets.  Let's take a quick look at those assets.

According to GE Capital's 10-Q for the March 31,2008 quarter, the bulk of GE Capital's assets were $417 billion in loans.  The only detail GE provides about its loan portfolio is delinquency rates (all of which were materially higher) and that $9.3 billion of the loans were "related to consolidated, liquidating securitization entities."  Anyone out there who knows what that actually means gets a gold star.  GE Capital also had $84 billion in "other" assets, with no accompanying detail.  For further information about GE's loan holdings and "other" assets, one must go to the year-end 10-K, which is outdated information, but offers a few clues as to the composition of assets.  Rather than provide an entire itemized list, I will highlight the parts that would concern me if I were to consider an investment in the company.

From GE Capital's 2007 10-K, some areas of concern about the then-$385 billion loan portfolio:

• $73.7 billion of the loan portfolio were Non-US residential mortgages, 26% of which were IO's with teaser interest rates on high LTV loans (at inception).  
• $27.3 billion were non-US auto loans.
• $22 Billion in infrastructure loans and leases, $11.6 billion of it tied to commercial aircraft leases. 
• $39.8 billion in real estate.
• $10.2 billion in "other."  No detail.
• $19.7 billion in total leveraged leases.  GE states that it is allowed to deduct the interest expense accruing on nonrecourse financing related to leveraged leases.  Just ask KeyCorp how well that worked out for them.  I'm not saying they did not account for it correctly, but I'd ask a few questions.

From GE Capital's 10-K, some highlights from the $83 billion in "other assets":

• $40 billion in "investments".  No detail.
• $17 billion in real estate, mostly commercial properties.
• $1 billion in "Other."
• $4.8 billion in "Other".  Not sure why this "other" was different from the other "other," but in my opinion you can't create a subcategory called "other" when you are attempting to describe "other" assets.

The highlights are screaming "mortgages! autos! aircrafts! other! other! other!"  I don't profess to have spent days analyzing the information, just a few hours.  Maybe someone with the time and patience to do a more thorough analysis can offer some further insight?  But if you still want to buy the stock without a more thorough analysis, despite the opacity of the balance sheet, be my guest.  We'll get together and discuss it after GE's next earnings report, or pre-announcement, which ever comes first.

Moody's Keeps Bear Stearns on Review for Possible Upgrade, Officially Loses All Credibility

According to MarketWatch "Moody's said it will continue to review Bear Stearns debt for a possible upgrade." Separately, and yet completely related, Bear Stearns shareholders begrudgingly approved the firm's sale to JP Morgan Chase yesterday. Despite the close of the sale, Moody's thinks it might possibly be a good idea to upgrade the debt, but it's not entirely certain so for now, it's just going to put it on review. Whatever shred of credibility may have remained after the Financial Times reported that Moody's accidentally awarded AAA ratings on billions of dollars of derivatives because of a computer bug, has officially evaporated. In the statement released today Moody's claimed that it would like to wait until it receives more clarity on the ultimate legal structure of the Bear Stearns and JP Morgan deal. Seriously, who cares? The merger is a done deal. How can any further analysis of legal issues possibly be of use to any investors? Anyone who is trading Bear's debt at this point is probably far more in tune with the legal issues than Moody's. Wanna work on some useful analysis? Here's my top four list of things Moody's can investigate that would actually help investors:
1.) Ask for a detailed list of Level 3 assets and their prices from every highly leveraged institution. Then tell me what they are actually worth. Make sure to downgrade those that refuse to offer the information, particularly any institution with an implied government guarantee.
2.) Go through GE's balance sheet and force them to describe the $25 billion in assets that it has labeled as "other" on its balance sheet. Then tell me what they are actually worth.
3.) Take another peek at the monoline insurers. Do everyone a favor and downgrade them from AAA BEFORE they go out of business.
4.) Take a look at all the assets being used as collateral against the Fed loans being offered to primary dealers. Tell me what they're really worth and if the Fed is using an appropriate haircut.
Anyone else want to add to the list?

"Liar Loans" Live Up To Expectations

Investors who purchased soured mortgages securities are forcing lenders to repurchase the original loans based on a provision that required lenders to take back loans that defaulted unusually fast if mistakes were made or fraud was committed during the underwriting process. The Wall Street Journal reported yesterday that Countrywide estimated that its liability for such claims rose to nearly $1 billion as of March 31, 2008. Countrywide took a first-quarter charge of $133 million for claims that have already been paid. The loan disputes allege bogus appraisals, inflated borrower incomes, and other misrepresentations made at the time the loans were originated. Demands from loan buyers include Fannie Mae, who claimed in a recent conference call that it was attempting to review every loan that defaults and force lenders to buy back loans that failed to meet promised standards. The bond insurers including Ambac and MBIA which guaranteed investment-grade securities backed by home-equity loans and lines of credit are also getting in the game of scrutinizing the quality of loans in the original pools and taking action where necessary. Even GE, through its subprime mortgage subsidiary WMC Mortgage, is being sued by PMI Group who alleges that WMC misrepresented the quality of loans it included in a pool of subprime loans that were insured by PMI.
Offering further proof that the incidence of misrepresentation was not merely a subprime problem, S&P cut or downgraded its ratings on $34 Billion of Alt-A securities yesterday. Ratings on 1,326 classes of bonds created in the first half of 2007 were reduced. Another 567 similar bonds with AAA ratings were placed on review. A total of 14% of the bond issuance from the period was either cut or placed under review. Late payments of at least 90 days and defaults among Alt-A loans underlying the bonds issued last year rose to 6.64% as of April 2008, up 65% since January of 2008. Clearly the situation is getting worse rather quickly. Alt-A loans were made to borrowers who provided little-to-no documentation of income or assets but had respectable credit scores. Among skeptics they were deemed "liar loans", as it gave borrowers ample opportunity to fabricate their income and assets in order to receive loans to purchase houses they otherwise could not afford. Investors in the securities must've assumed that either borrowers were telling the truth or home prices would never decline. Loans were offloaded by the originators to investors who were more than willing to purchase diversified pools of these loans as they were given AAA ratings by the ratings firms.
Investors are now facing the double whammy of misrepresentations of the borrower's financial condition coupled with declining home prices across the nation. As a consequence, default rates on the loans are surging beyond original estimates when the securities were structured, leaving investors with losses. The ratings agencies are, of course, late to the downgrade party as the securities are already being pummeled in the market. Pissed off investors are now attempting to recoup losses by forcing the originators to repurchase the loans because the quality of the loans was misrepresented. The top four Alt-A lenders in early 2007 were Indymac, Countrywide, GMAC, and Washington Mutual. Clearly these once celebrated lenders have suffered a considerable drubbing. Yet, bottom-fishers have emerged, betting that their fortunes will turn. Given the continuing parade of lousy housing news, I remain a skeptic. Furthermore, I'm disappointed that I never took advantage of the opportunity to purchase a $25 million home using my imaginary bars of gold as a stated asset.

GE to Sell Appliance Unit

GE is planning to sell its appliance division, one of the oldest and least glamorous portions of the conglomerate's huge and disparate holdings. Apparently, CEO Jeffrey Immelt is facing increasing pressure to divest some underperforming businesses to appease shareholders who were angered at the company's disappointing earnings announcement. Mr. Immelt had the audacity to miss earnings guidance just a few weeks after giving a chipper view of the company's outlook. Furthermore, as I reported here a few weeks ago, Mr. Immelt faced the indignity of being scolded on national television by his former boss, Jack Welch, who publicly derided the new CEO for accurately reporting GE's results. After the public flogging, I'm certain that Mr. Immelt regretted selling off the insurance business several years ago, since he could no longer borrow from insurance reserves (as his former boss had done for many years) to boost earnings results to satisfy Wall Street analysts.
Frankly, I don't know if it a good idea for GE to sell its appliance unit. I'm sure it's good for the investment bankers who will earn a few bucks. Investment banks love companies that are constantly buying and selling units. So many "synergies" and "strategic alliances" to nurture, while at the same time "unlocking value" and "focusing on core competencies." These are just the catch phrases I've heard of, but any good one will do as long as the churn continues.
I have a suggestion for Mr. Immelt on how to raise $25 billion dollars. Go through the balance sheet and sell every asset that is labeled as "other." I took a look at GE's 10-K after the earnings miss recently and tried to determine if I could figure out its holdings from looking at the balance sheet. Although GE is often described as an industrial conglomerate, it is actually a huge financial services firm with no regulatory capital requirements or ability to borrow from the Fed if it runs into trouble. Intellectually, I have an interest in determining where GE's exposure lies. The most interesting thing about my analysis was the many categories labeled as "other" on the balance sheet. When I scrolled down to the appendix, I was surprised to find that within the descriptions of the "other" categories were further sub-categories labeled as "other." Adding up all the sub-categories yielded a grand total of $25 billion worth of assets without any detailed description. Perhaps that seems like a trifle for a company that has $800 billion in assets? But it represents about 21% of GE's book value. Maybe Mr. Immelt would consider "unlocking" some of that value?

Welch Retracts Credibility Statement, Now Claims Immelt Going to Hell

Wait a minute. What? He said he's a "hell of a CEO?" Oh. I'm sorry. I guess I must've misinterpreted his statement. Just like Welch claims he was misinterpreted when he announced to the financial universe yesterday that Immelt had a "credibility problem" on live television. I'm guessing GE stopped paying for Welch's use of a good PR agent when it redesigned his retirement package after it was leaked to the media during his highly publicized divorce. However, it's nice of GE to give Welch more airtime to apologize for bad-mouthing the CEO for being honest with investors. Who has the credibility problem now?

Former GE CEO Welch Advises Immelt to Manipulate Earnings

Jack Welch was on CNBC this morning criticizing Immelt, claiming that he had a "credibility issue." Welch asserts that Immelt promised to deliver strong earnings three weeks ago and he didn't deliver on that promise. I believe what Welch is saying is that Immelt should have used some fancy accounting tricks to artificially boost earnings in order to satisfy Wall Street analysts, just like Welch did when he was CEO. Ever wonder how GE beat earnings by a penny for many years under Welch's reign and achieved spectacular returns? It under-reserved insurance reserves for years, thus artificially boosting earnings. Welch conveniently retired, taking an egregious retirement package which became public during divorce proceedings from his second wife who he left for a much younger woman. Immelt then had to boost reserves to an adequate level in order to sell the insurance arm, basically wiping out most of the earnings gains from Jack Welch's last five years in office.

Although GE's earnings were a disappointment, and Immelt should've been more conservative when giving guidance, he did the right thing by reporting lousy earnings. I'm not a huge fan of GE in particular, but I actually believe that Immelt is a much better CEO than Welch ever was. Welch was lucky, and crafty. In my opinion, he is also mostly responsible for the absurd CEO packages awarded to CEOs for doing mediocre work. When GE was picking a successor for Welch, Welch made certain all three contenders for his job received enormous retention bonuses at GE, thus forcing other companies who wanted to hire the losers to offer absurd guarantees. Who was one of those contenders? Our friend Robert Nardinelli, who was recently forced out of Home Depot with $200 million in pay that he felt he deserved. Shareholders and the board disagreed. Maybe it is Immelt who should be giving Welch some much-needed advice: Get a hobby and stop telling me how to do my job.

GE Drops the Bomb

GE shocked the market with a lousy earnings report, sending its shares down 10% and taking the rest of the market down with it. Analysts were shocked, absolutely shocked to discover that GE is really just a large financial company masquerading as an industrial titan. Earnings from GE's financial services arm were down 20%. According to CEO Immelt "The financial services environment was very difficult and became even more difficult late in the quarter." No surprise to anyone except for the Merrill analyst who upgraded this stock to a "buy" on March 20th. The stock actually rallied 5.3% on the upgrade, as the analyst claimed confidently that GE would not suffer from the difficulties in the credit markets. Maybe the cheery upgrade was in response to GE buying Merrill's consumer finance unit in December, helping Merrill free up some much needed capital? This is just pure speculation on my part as equity analysts don't have a history of conflicts of interest. The moral of this story is never take stock advice from a company who is about to post yet another $6 billion or so in further write-downs.