Madoff whistleblower Harry Markopolos calls GE a ‘bigger fraud than Enron’

https://www.cnbc.com/2019/08/15/ge-shares-drop-after-madoff-whistleblower-harry-markopolos-raises-red-flags-on-its-accounting.html

by one2zero • 7 years ago

297 236 7 years ago

cnbc.com

one2zero7• 7 years ago

What's hilarious is that if you look at the website gefraud.com and attempt to download the report take a look at the fine print. These guys SHORTED GE before they made this report public....

Edit: Guys, I understand the logic behind shorting GE, what I found funny was that they made it public that they had short positions in their disclaimer. IF I were in their position I would've shorted GE just like any other individual with this information.

sseveran• 7 years ago

That is literally what short sellers do. They find something they don't like, short it, and then try to drive the price down through publicity.

sokoloff2• 7 years ago

Or, they find something that has generally hidden flaws, short it, and then shine light on those flaws.

SantalBlush• 7 years ago

It's not that strange. When people buy a stock, they'll pump it with positive stories too. Or they'll downplay any malfeasance.

sschueller3• 7 years ago

I would too if I discovered such information and if they did it without insider information I don't see anything wrong with it.

Analemma_• 7 years ago

If they have information that GE is overvalued, what should they do? If they don’t short, people like you go Taleb and accuse them of throwing out accusations with no skin in the game; if they do short, they get accused of making things up for profit. They can’t win.

floatingatoll• 7 years ago

They can win, if they prove their case and it is found to be true and comes to pass as they say it will. Until then, the company being shorted will generally lash out regardless of the truth or not of their accusations.

one2zero7• 7 years ago

But you see, I didn't say that they were wrong or right. I merely was pointing out the fact that they put in their disclaimer that they did in fact have short positions on GE prior to publication.

bart_spoon2• 7 years ago

Generally at this point worrying about what Taleb and his fanboys think shouldn't be anyone's concern. They only "can't win" if they are concerned with fringe voices who are constantly looking for fights to pick.

zaroth2• 7 years ago

Disclosure of a financial position when offering any kind of commentary on a stock is legally prudent if not explicitly required.

I believe adding the disclosure serves as a mitigating factor if it turns out your analysis was bullshit, if the SEC tries to come after you for fraud.

sschueller3• 7 years ago

I can't download the report, I get a server error when submitting the form. Does anyone have a direct link?

one2zero7• 7 years ago

Direct Link from CNBC:

http://fm.cnbc.com/applications/cnbc.com/resources/editorial...

elliekelly5• 7 years ago

It rubs me the wrong way that they require your name & email in order to access the report.

sschueller3• 7 years ago

Is this the tipping point that will start the recession?

nappy-doo• 7 years ago

Doubt it. GE is small potatoes nowadays.

whatok• 7 years ago

I'm not agreeing with the previous poster but GE is anything but small potatoes nowadays. They have over 100bn in debt and there's a very real case where they get downgraded to high yield which is a near death sentence for an industrial company of their size.

camjohnson262• 7 years ago

There’s much bigger problems with the economy than GE. See the yield curve inversion yesterday, the most reliable signal we have of a pending recession.

theandrewbailey• 7 years ago

My bet is the trade war will be blamed as the reason for it. Looks like we're well underway.

NikolaeVarius2• 7 years ago

I like they put their money where their mouth is and shorted GE. Actually puts their skin in the game before making accusations.

joncrane• 7 years ago

By the same token, people who buy the stock before engaging in "pump and dump" have skin in the game before making their statements.

kingnothing• 7 years ago

I wonder if that could be considered securities fraud. They had insider knowledge that their report would damage the stock price of GE.

sokoloff2• 7 years ago

Is it insider knowledge? Or merely non-public knowledge that they legally generated from their own research efforts?

one2zero7• 7 years ago

Prior to the initial distribution of this Report on August 15, 2019, the Company also submitted this Report to the U.S. Securities and Exchange Commission’s Whistleblower Program and the U.S. Department of Justice’s FIRREA Whistleblower Program. Both or either of those submissions may generate profits for the Company independent of the financial performance of GE and/or the securities, derivatives, and other financial instruments of, and/or relating to, GE.

dboreham• 7 years ago

Actually this is standard practice in the shorting industry and perfectly legal since the information is publicly available. It was entirely their goal to push the stock price down just as there are legions of folks trying to do the opposite (in perhaps not so immediately obvious ways).

zaroth2• 7 years ago

If you hold the stock and make a knowingly false statement about the stock in an attempt to move the market, particularly without disclosing that you hold the shares, it may be securities fraud.

The line is very difficult to draw between constitutionally protected speech and securities fraud. [1]

[1] https://scholarship.law.missouri.edu/cgi/viewcontent.cgi?ref...

hyperpape• 7 years ago

Short answer: probably not unless they're willfully lying.

I posted a column related to short-selling a while ago. https://news.ycombinator.com/item?id=18017060.

driverdan2• 7 years ago

So long as the information is public it's not insider trading.

elthran• 7 years ago

To paraphrase Matt Levine - everything is securities fraud

okmokmz• 7 years ago

They had insider knowledge

No, as the author stated all of the information used is publicly available

eledumb• 7 years ago

duh, whether it's true or not when their accusations are release the initial knee jerk reaction from the sheeple will be to sell which will drive down the price.

Shorting GE before making the accusations is profiteering in my book. If it turns out they were wrong they'll still be able to make money on the short, buy back in with the profits and then when the stocks rebound they cash in again.

The entire stock market is a ponzi scheme for insiders.

NikolaeVarius2• 7 years ago

If it turns out they were wrong they'll still be able to make money on the short, buy back in with the profits and then when the stocks rebound they cash in again.

Explain

jcfrei2• 7 years ago

No, if Markopolos's allegations are correct then this is exactly how financial markets are supposed to work. They are about price discovery - the reward for this information integration is the profit that Markopolos and the Hedge Fund have made / are about to make. If these allegations prove to be baseless then they will receive a hefty fine by the SEC which I'm sure will at the very least take away any profits they've incurred.

0xDEFC0DE• 7 years ago

Shorting GE before making the accusations is profiteering in my book

It's also how you call companies out on their bullshit and counter their PR deflection game.

And yep, if I do a shit load of accounting research, figure out one of the biggest conglomerates has about $38 billion in fraud, you bet your ass I expect to get paid for the effort. I'm morally on board with the authors getting the first shorts in.

OrgNet• 7 years ago

maybe it should be illegal for them to profit from the stock going down for the next 4 years or something like that....

panopticon• 7 years ago

If it turns out they were wrong they'll still be able to make money on the short

This would be called "short and distort". That'll win you a friendly visit from the SEC.

the_watcher2• 7 years ago

Isn't it more the reverse? They shorted GE, so now they're well positioned to reap the benefits of convincing other people to short GE, regardless of the truth of the accusations.

pbourke• 7 years ago

That's sort of the whole point of these things. Not like they're writing this report for free ...

bart_spoon2• 7 years ago

Also creates an financial incentive to try and spread FUD to tank the stock. "Skin in the game" is overrated. It inclines one towards partiality rather than impartiality.

ptah• 7 years ago

if this is based on public record, how come it is only exposed now

rtb• 7 years ago

There are two economists – one young and one old – walking down the street together.

The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”

Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now.”

SpicyLemonZest• 7 years ago

Libor manipulation was on the public record years before the scandal blew up. Exposing anything but dirt-simple financial fraud is hard, even to people who know all the facts.

Scoundreller2• 7 years ago

Libor was always a joke.

If you’re looking for a loan, why would you care what the average rate is between a number of providers? You’re going to take the lowest rate, right?

And then why would you throw out the lowest and highest values? One of those is the most competitive rates!

It also didn’t say anything about depth of market. A bank may have loaned you $1 at a low rate, but maybe not any more than that.

And then it was all self-reported, not based on market.

derivagral• 7 years ago

Amusingly(?..) LIBOR-style manipulation still exists in other markets! https://www.bloomberg.com/opinion/articles/2018-02-01/was-ch...

Strange to think that incentives like this are/were considered the best solution and can last so long.

kaesar14• 7 years ago

Malcolm Gladwell has a great piece about how all the information needed to piece together Enron's fraud was always available in public records. Worth a read.

https://www.newyorker.com/magazine/2007/01/08/open-secrets-3

ortusdux• 7 years ago

GE has been a mess for a while now. I know many vendors that won't ink a deal with them because they always try and pay at the end of next quarter. Ironically, because everyone knows their tactics, they either end up paying more for reputable vendors that need an insurance buffer, or they end up with a worse product from fringe companies that are willing to roll the dice on getting paid.

stcredzero• 7 years ago

I know many vendors that won't ink a deal with them because they always try and pay at the end of next quarter.

That soon? I've known companies with cash flow issues try to turn contractors' Net 30 or Net 90 into Net 180 and beyond.

one2zero7• 7 years ago

That's called NET Wednesday, Wednesday get around to paying you.

patwolf• 7 years ago

We recently did work for a very large corporation that switched from net 60 to net 180. I'm not sure if they did it for cash flow reasons, but I doubt it. We're a small company, so it was tough for us considering we'd be paying developers 6-months of salary before we'd see a dime. They did conveniently offer financing so that we could get paid sooner, albeit with interest.

It seemed to me like large corporations feel that they can strong-arm their vendors into unsavory terms because of their clout.

jcims• 7 years ago

Ran a very small security consultancy. The bigger the company the worse they were at paying at the agreed upon timeframe. (Looking at you Toyota)

6d6b73• 7 years ago

Funny thing about NET terms.. Now a lot of the large companies do billing only twice a month. So if you're unlucky your NET 30 will change to NET45 + 5 days for mailing, bank processing etc.. Somehow I always get unlucky and miss their billing day with my invoices.

camjohnson262• 7 years ago

Here’s a quick blog post that points out a few problems with the report.

https://brontecapital.blogspot.com/2019/08/the-flat-out-sill...

It looks like Markopolis claimed GE’s margins were too good to be true, even though they’re below the industry average.

Also he compares this section of the business with another company that GE spun off, seemingly not knowing that they were originally linked.

Doesn’t seem like a very credible report if these 2 things are true.

one2zero7• 7 years ago

Yeah if GE was 7% of my portfolio I'd be running interference too. With a cost basis of est $ 9.99.

https://whalewisdom.com/filer/bronte-capital-management-pty-...

elliekelly5• 7 years ago

I'm torn because I've definitely heard plenty of rumblings about GE Capital over the past decade so the accusations certainly seem plausible. I feel like I even opened the report expecting to confirm the rumors I had heard. But I've only made it to page 5 and so far it's a lot of hot air without any substance. And the tone of the writing is needlessly flippant. It's difficult for me to take the report seriously.

For example, this sentence raises red flags to me:

I won’t reveal every technique we used because every wannabe accounting fraudster out there is going to be reading this section closely looking at it as a “how not to get caught” primer. There’s no point in making them harder to catch than they already are.

We're just supposed to take him at his word in order to protect ourselves from "wannabe accounting fraudsters" who might try to repeat what GE has done? That doesn't make sense to me. Revealing GE's supposed tricks would allow everyone else in the industry to better monitor for them.

rz2k• 7 years ago

I agree that it's not a credible statement. I do not think that their primary interest is the public good, even if the public good is ultimately a beneficiary of their possible discovery of fraud and shorting of GE.

Releasing the statement is meant to fight the implications of the saying, "Markets can remain irrational a lot longer than you and I can remain solvent." In other words, they want the market to move faster toward the correction they believe GE should undergo. They are not disinterested, they need people to believe them.

In fact, this type of statement in retrospect has been the biggest sign that Enron was a fraud that should have been discovered earlier. Typically a fund that has a black box producing returns trades at a lower price than its yields alone would justify. You get punished for not showing your work. Enron on the other hand claimed that their black box deserved a premium.

GE could be a fraud, but when the messenger says not showing their work is a feature, there should be a presumption of shadiness.

ineedasername2• 7 years ago

I started smelling something odd when the site wanted my personal info in order to let me download the report.

In general though, I find the claims plausible, but what sort of access did he & his organization have as outsiders? It's not like they had full audit access. Access of publicly accessible documents doesn't seem like it would be enough.

busyant• 7 years ago

I'm torn because I've definitely heard plenty of rumblings about GE Capital over the past decade so the accusations certainly seem plausible.

Back in the 1990s and maybe early 2000s, GE would 'beat' analyst profit estimates every quarter by 'a penny' per share (occasionally by a few pennies). This went on for _many_ years.

I don't have any special insight, but this always struck me as _fishy_. You have a stable of presumably competent analysts prognosticating on your next quarter's revenue and profit and you consistently beat their average estimate _by a tiny bit._ You would think that you would come in _under_ the estimate every-so-often, but that was incredibly rare and the consistency always had a whiff of impropriety.

It wasn't just GE that did this. Many Fortune-500 companies had similar behavior, so perhaps it has an innocuous explanation, but I always wondered how it was possible to consistently beat estimates like this.

miohtama• 7 years ago

Short selling - the bug bounty hunting for the stock markets. Also no smoke without fire?

If their accusations are correct they already made a hefty profit with shorting the stock.

If their accusations do not hold water SEC will fine them for the market manipulation - would be quite hard to dispute it in this point.

Why would anybody take a risk of getting SEC coming after them?

But then it gets quite murky if some of the claims are true and some untrue.

jjeaff2• 7 years ago

Not just the SEC. GE could sue them into oblivion as well.

DannyBee• 7 years ago

The report specifically and repeatedly talks about the genworth spinoff (in multiple sections) and how it was supposed to help in various ways but specifically didn't.

Given their stake, this seems like bronte capital trying to do damage control.

The report itself would be more persuasive (IMHO) if written less flippantly, but this is definitely not a sane criticism of it ...

If you remove the flippancy, there are some serious issues exposed by this report (the GAAP vs SAP accounting tricks GE keeps claiming won't matter but will, double counting BHGE, etc)

one2zero7• 7 years ago

Direct Link:

http://fm.cnbc.com/applications/cnbc.com/resources/editorial...

mistrial9• 7 years ago

I distinctly recall a USA top-ten business school with an ad for "Financial Engineering MBA" (yes, real math) showing a small, smiling brown-skinned woman in Fortune 500 business attire. At the same time, top management at GE mentioned "financial engineering" as a strength in the business press.

Perhaps it is an obvious evolution of their complex asset leasing models from forty years ago to "financial engineering", but the implications of a USA engineering firm, outsourcing all the work and focusing on money tricks instead.. it just shouts everything that went wrong with American Business, to me.

breck3• 7 years ago

It makes me sad every time I see strong American businesses getting into the "financial engineering" business. It's not just GE. Every time I take a flight nowadays the attendants come around pitching some airline branded credit card; you buy a shirt at a clothing store and are asked to sign up for a credit card; buying diapers at Target--"do you want to sign up for the Target debit card"?

American banks and "financial engineers" are good at screwing over the 80% of the population, and transferring wealth to the 1%, and the fact that they are able to pull in great American companies into their schemes is embarrassing, disheartening, and in the case of GE Capital, foreboding.

For decades they were screwing me over and then when I joined the 1% it was suddenly, "hey, come open a bank account with us and we'll give you $5K!" Shameless.

mikestew2• 7 years ago

The onslaught is so constant, I sometimes just want to scream at a clerk, "JFC, what happened to just exchanging money for goods and calling it a day?!" Of course, it's not their fault, the person I want to scream at is well insulated from screaming customers in some corporate office somewhere. But $DEITY forbid the clerk not ask, because someone's numbers will be down. That part will filter right the fuck up to the correct person.

Ignore your twitching knee when I say this, but it's one of the things I like about Apple: "here's some money. Might I have one of those fine devices you have on display?"[0]

"Certainly my good sir! Let me fetch one from the back...here you are. Apple Care? No? A fine choice, sir! Have a nice day!"

No cajoling about some card. If you don't want the extended warranty, it's a simple "no" and done. No popups on their internet properties asking to join their mailing list. I give money, they give me stuff. I'm sure there's some dark pattern I've missed, but for the most part the experience seems to be free of such jackassery.

[0] Admittedly, this part needs work lately at their retail stores.

rolltiide2• 7 years ago

Airline branded credit cards are not the same as store branded credit cards and none of this has to do with financial engineering. None of the comments in this thread do.

listenallyall5• 7 years ago

All your examples are marketing ideas and promotions. Nothing at all to do with financial engineering. As much as you seem to enjoy complaining, surely your favorite companies engage in the practice -- hedging currency risk, locking in stable fuel prices, avoiding interest rate shocks.

api• 7 years ago

I've said for years that the MBA is the Western capitalist equivalent of the Soviet "apparatchik."

https://en.wikipedia.org/wiki/Apparatchik

I wonder if the bullshit taught at top tier business schools starting in the 1980s isn't as responsible or perhaps even more responsible for the destruction of American industry than outsourcing, bad trade policy, and other more familiar villains. A generation or two of business leaders were systematically educated on how to trade away deep proficiency and substance for financial smoke and mirrors. GE is a microcosm of what the entire country has done.

ineedasername2• 7 years ago

It goes back further than the 1980's. It had its advent with the rise of business/managerial "science" that thought trained middle & senior managers could become standardized units of productivity to be swapped in & out of any position as equivalent units. It left out the fact that good managers have strong knowledge of the operations under them and the business as a whole, not just a managerial rule book.

throwaway156503• 7 years ago

It would be helpful if people commented on why you were downvoted.

Americans have no appreciation for businessmen and businesswomen with experience. Sales people at Levi's who don't know how to measure your waist, roofers who don't know how to repair roofs, only replace them, dealerships who don't know how to repair, only upsell to the newest car.

Too much bullshit and not enough hardwork. Too many charlatans and not enough seasoned tradesmen, salesmen, and otherwise.

bumby6• 7 years ago

It's been a while since I read it but I think the book "The Firm" about McKinsey talked a bit about this movement and how business studies became a graduate degree.

i_am_proteus• 7 years ago

The contemporary "top" MBA is a class reinforcement mechanism, nothing more, nothing less.

arethuza• 7 years ago

My own theory about MBAs is that it seems to be a signalling mechanism where people are saying "I want to stop doing <stuff> and want to manage people doing <anything>" - spending the time and money being a way of signalling that you are serious about being committed to management rather than being a practitioner.

ryanjshaw3• 7 years ago

it just shouts everything that went wrong with American Business, to me.

Quite the opposite. Sound financial management implies financial engineering. I recommend you study and understand the field before criticising it; it's not "tricks" at all.

TheOtherHobbes• 7 years ago

Except when it is. See also Enron, the Trump "empire", Libor, gold price fixing, the 2008 crash, S&L, and many more.

jacobolus• 7 years ago

As an uninformed outside observer, I have seen a large number of companies that used to pride themselves on product quality, customer support, and treating workers well get bought by private equity or other finance guys (or maybe sometimes just taken over from inside), shed everyone competent, focus on cost cutting and nickel-and-diming customers, and start producing garbage products with no support, transforming the relationship with customers into a largely adversarial one.

In many cases the finance guys have (legally?) embezzled large amounts of money while loading the companies with debt and then dumped them, leaving customers, employees, suppliers, and other investors holding the bag.

I’m sure this process is considered to be “sound financial management” by some.

hitekker• 7 years ago

For those momentarily misled by this condescending comment:

Despite its name, financial engineering does not belong to any of the fields in traditional professional engineering
It is generally (but not always) a disparaging term, implying that someone is profiting from paper games at the expense of employees and investors.
Many other authors have identified specific problems in financial engineering that caused catastrophes: Aaron Brown[23] named confusion between quants and regulators over the meaning of “capital”, Felix Salmon[24] gently pointed to the Gaussian copula, Ian Stewart[25] criticized the Black-Scholes formula, Pablo Triana[26] dislikes value at risk and Scott Patterson [27][28] accused quantitative traders and later high-frequency traders.

https://en.wikipedia.org/wiki/Financial_engineering#Criticis...

bumby6• 7 years ago

I'm willing to guess the disagreement here is due to the definition what constitutes 'financial engineering'.

I would say most laypeople would agree that using applied mathematics to hedge investments and reduce risk is okay. Most would probably also say that creating overly technical mechanism to obfuscate what is really going on would not be acceptable. I think this is why people cringe at the prospect of more and more derivative financial products being 'engineered' to create value.

I personally say it gets gross from the standpoint that it is almost entirely a field of contrived rules of convenience. In other words, the 'system' is entirely human-created which comes with all the shenanigans humans bring to the table. This is in contrast to traditional engineering disciplines that are generally rooted in some sort of physics. A mechanical engineer can improve their understanding of reality, but cannot wave a magic wand and make different a different reality for their system to operate within.

hogFeast• 7 years ago

2007 called. They want their insight back. GE sold off GE Capital over a decade now. None of the "financial engineering" relates to leases (although the dodgy accounting often does...but that is something else).

Financial engineering is usually concerned with building and valuing pointless derivatives.

In most cases, the derivative will pay equity-like returns with low volatility or income (stupid financial advisers go nuts for both). Invariably, these products self-destruct in a crisis (when the lads are off in their Ferraris) due to some bizarre optionality that is built in.

The other side is valuation which is about employing a combination of inapplicable maths with a wilful ignorance of common sense (usually to satisfy regulators who will approve your bullshit and then come to work with you next year to make up more nonsense).

The first task is dressing the pig up. The second task is inventing a mathematical formula that explains why the pig is actually a human. French banks are pretty much ground zero for this (I have no idea why).

Also, nothing is particularly wrong with American business. Most firms are not involved in anything like this, and when they do get involved it is rarely a case of them deciding to do so. They do so because they feel they have no other choice (i.e. engineering firms provide finance so that people buy their stuff, GE Capital existed because of the torrent of cheap money that flooded the market in the 2000s). The general move to greater financial efficiency, however, has been a massive boon (look at places that haven't done that...Japan is a great example, you want to work 12 hours for a day for like $35k/year?).

nosianu• 7 years ago

nothing is particularly wrong with American business

I am in no position to argue and it is not my intention to do so. Instead, I have a question based on things I (causally) read.

For example, this piece from a conservative source: https://www.theamericanconservative.com/articles/americas-mo...

Sample quote serving as TL;DR:

In fact, the destruction of America’s once vibrant military and commercial industrial capacity in many sectors has become the single biggest unacknowledged threat to our national security. Because of public policies focused on finance instead of production, the United States increasingly cannot produce or maintain vital systems upon which our economy, our military, and our allies rely.

It is not really only about the military, but about a larger context. They seem to be quite concerned about the industrial base of the US, including in high-tech industries. In support of their point, when I look up chip manufacturing capacity worldwide - https://anysilicon.com/semiconductor-wafer-capacity-per-regi... - Asia is 75% and the US ~10%.

What is your opinion about the point made by the article? In the larger context, not necessarily the military focus.

msbarnett3• 7 years ago

GE sold off GE Capital over a decade now.

They did? TFA (and Markopolus’ report) doesn’t seem to reflect that:

In January 2018, GE reported a $6.2 billion charge based on liabilities in its long-term care business, which is run by the company’s financial services unit, GE Capital. To make up for the costs, GE Capital said it needed to set aside $15 billion to hold against potential losses, and stopped paying a dividend to its parent company for the “foreseeable future.”

A cursory glance at Wikipedia suggests some subdivisions were sold off between 2015 and 2017, which is...not the whole thing and definitely not “over a decade ago”

rockinghigh• 7 years ago

GE did not sell all of GE Capital; they are still in business and part of GE. From GE's answer to Markopolos:

The Company ended the second quarter with $16.9B of Industrial Cash excluding BHGE, $12.5B of liquidity at GE Capital and access to $35B of credit facilities.

https://www.genewsroom.com/press-releases/ge-addresses-claim...

yold__• 7 years ago

GE sold off GE Capital over a decade now.

No, they spun off some of their LTC and Life Insurance business into Genworth, which, incidentally is suffering from some pretty severe LTC woes themselves.

LTC is literally the textbook case study in shitty actuarial assumptions. A combination of low interest rates, huge medical expense inflation, adverse experience (i.e. people staying on claim for 2x as long), and low lapse rates have bankrupted at least one insurer in the last two years (Coloniel Penn). Genworth may be next.

GE's auditor KPMG has had some "strikes" against them in recent years that are bad enough to draw attention from the PCAOB.

nguoi• 7 years ago

I have no idea what the colour of her skin has to do with this story

intuitionist• 7 years ago

Or her gender. Or her size?

dk1138• 7 years ago

Perhaps just to call out if it triggers a memory for others who may recall the story?

oarabbus_• 7 years ago

Found that a bit odd as well

stickfigure• 7 years ago

I think it's a mistake to imagine GE as some sort of monolithic "engineering firm". GE is a huge conglomerate with business in countless different industries (trains, nuclear plants, chemicals, light bulbs, jet engines, health care, missiles, oil & gas... the list just goes on). There's no way the MBA team at the top can have the faintest idea what's going on in each of those companies, engineering-wise.

It's better to think of GE as a mutual fund. Management and financial engineering is what holds it together.

jiveturkey• 7 years ago

All large companies, certainly 100% of the Fortune 500, are engaged in financial engineering. That GE does it is not at all surprising.

To specifically call it that, publicly, is interesting. Was this a recent ad?

papito4• 7 years ago

"Financial engineering" is pillaging the company while diverting money into ludicrous bonuses and raises at the corporate office.

The top skill of most MBAs is sorting an Excel sheet by salary, in descending order, and deleting the top 10 rows to "restructure".

IfOnlyYouKnew• 7 years ago

...and the top skill of most tech people is spreading superficial, malignant stereotypes of professions they fail to understand. Those include everything that is not a direct derivative of classical logic and mathematics, because they refuse to consider any creative or social domains to be "real".

Because of this narrow view of the world, the tech crowd is constantly perplexed by the continuing dominance of that other tribe in their organisations as well as society at large. This inferiority complex causes them to indulge in ritualistic in-group demonisation, whereas the reverse manifests mostly in brief interludes of eye-rolling whenever the internet goes down.

hangonhn3• 7 years ago

It's inaccurate to say that GE outsourced all their engineering. That's not true at all. GE Aviation is a powerhouse and their engineering abilities is still world class. Despite all of China's advancements, creating engines like the type GE Aviation created is still beyond their reach (although they will eventually catch up).

GE Power made a bad bet against renewables and went with gas but that's a business mistake, not an engineering one. They recently hit a milestone with one of their biggest wind turbines. So they're slowly fixing themselves. This is again a management error, not a lack of engineering abilities.

GE Healthcare is still a leader in their field and also VERY valuable (along with Aviation, these two parts are the best parts of GE).

What the problem for GE is that they've saddled themselves with financial engineering and moved away from their core competency to generate the numbers they want. At one point that made a lot of sense because it enabled their customers to make those large capital investments but then GE managers started using GE financial engineering to smooth over earning reports. Anyone remember when GE was the darling of Wall Street? GE was touted as this well managed firm that gave steady dividends. Well part of that steady dividend and growth came from these financial engineering methods and rather opaque accounting practices (to be fair other companies did similar things).

I can't tell you if GE is a good investment or not. I am long on GE but this new report is pretty damning but as someone pointed out, the person behind the report is far from neutral. Then again, having followed GE for so long (I was long on them starting 2008, sold it all before the plunge, and now long again), there are no real neutral voices in this debate. This though is the fault of GE management, which is not as transparent as they should be.

swframe2• 7 years ago

I'm curious. Why are you still long on GE given today's news? Do you disagree with Markopolos' findings?

lonelappde• 7 years ago

Let's just say that the fact you thought it important to mention the height of the person in the ad is the first of several clues that your comment is... suspect.

sleepysysadmin• 7 years ago

I recently did an analysis of GE as well. Largely speaking found their numbers to be too good to be true.

_-___________-_• 7 years ago

The Affinity is built around the CFM56 core. Not a brand new turbofan, just a further development of a massively successful product.

Edited to add: there was originally a lot of vague insinuations about the GE Affinity turbofan in the parent comment, but it was edited down from five paragraphs to one after I replied.

piker• 7 years ago

Before becoming too concerned with the fact that the author of this report is compensated based on the performance of the sponsoring fund's short position, one should note that it has been argued that allowing Enron insiders who knew of the irregularities to short Enron stock would have supplied a downward pressure that may have saved Enron employees millions of dollars. Many of those employees were investing 100% of their 401k into the stock at its peak.

the_watcher2• 7 years ago

The first part of this comment is accurate and important. The second part is pretty much always what fraudsters claim when caught: "I could make it all back given enough time, I just need that one big score!"

wil4212• 7 years ago

The FinTech company I work at offers ESPP and an option to invest in company stock for your 401k. I take full advantage of ESPP but sell it quickly. My coworkers have saved it and been through 3 splits and made a ton of money. The same coworker lost 10s of thousands when he worked for WorldCom/MCI in the late 90s. He’s probably even right now.

I would never invest 100% of my 401k into my employers stock. Even 10% seems risky.

cjarrett• 7 years ago

my mother's 401k at the time, they were forced to buy company stock. Her company was also in the process of merging with Enron. Luckily, my father had a better plan so they ended up mostly investing in his and what was left over they invested in hers.

tradeWar• 7 years ago

Also GE has been putting executives in jail with the help of the American government in order to put pressure and takeover foreign companies.

https://www.bloomberg.com/news/articles/2019-01-15/-the-amer...

https://www.counterpunch.org/2016/12/02/behind-ges-takeover-...

https://www.economist.com/business/2019/01/17/how-the-americ...

VladimirIvanov• 7 years ago

Marlopolos point where he says the Baker Hughes investment should take a goodwill impairment charge is incorrect. GE is right when they point out that they own more 50% of the company so it needs to be consolidated.

Grzegrzolka• 7 years ago

I have friends working as senior developers for GE in Poland. Basically US branch outsource project to Polish brand because they are paid peanuts in comparison, then part of the work is outsourced to India branch which is paid even less. I have ZERO respect for American mega-corps.

madengr• 7 years ago

Is Poland outsourcing to India, or direct from America to India? The former reminds me of the guy who outsourced his own job to India?

wil4212• 7 years ago

At my last job I worked exclusively with our Europe branch and European customers. 75% of the developers I worked with were contractors or consultant companies they outsourced to. More than half also had offshore India teams.

You’d recognize all the customers names and likely own their products.

ummonk• 7 years ago

Will the long term care insurance policyholders don't get screwed out of their policies if GE goes bankrupt?

drewnick• 7 years ago

Each state has a Guaranty Association that provides up to several hundred thousand dollars per policy for failed insurance companies. We've seen this story before with Penn Treaty which was liquidated in 2017. In California it's $560k. https://www.califega.org/

tabtab• 7 years ago

GE decided that playing financial tango is more profitable than manufacturing. Too many US companies become shell-game manipulators rather than shell makers. Maybe that's somehow fine and normal, but it's hard to sleep sound at night knowing the US economy's main product is financial tiddlywinks.

astrodust• 7 years ago

This has been the end-goal since the 1980s when everyone realized there was way more money to be made in running companies into the ground to sell them off for scrap, raiding pension funds, and securitizing everything.

Why make things when you can just make money?

arbuge2• 7 years ago

An alternative viewpoint:

https://brontecapital.blogspot.com/2019/08/the-flat-out-sill...

As Charlie Munger says, always look at the incentives to understand people's behavior. Markopolos' sponsoring hedge funds are shorting GE:

https://www.bloomberg.com/news/articles/2019-08-15/ge-drops-...

"Markopolos is working with a hedge fund he didn’t identify and stands to benefit from bets that GE’s stock will decline, according to the Wall Street Journal, which reported earlier on the accounting report. Markopolos and his colleagues also hope to collect a whistle-blower reward by reporting their findings to regulators, the Journal said."

msbarnett3• 7 years ago

As Charlie Munger says, always look at the incentives to understand people's behavior.

Should that include looking at the fact that GE constitutes ~7% of Bronte Capital Management’s portfolio?

I’d want to spin things positively for them too, with that much skin on the line.

eej71• 7 years ago

While it can certainly color Bronte Capital's motivations, the author of the paper (John Hempton) has generally been forthright in his analysis of other companies and his analysis of GE doesn't seem different from his other comments.

tdaltonc• 7 years ago

That's an important point. But this is not a one-shot game. When they're all sitting around the table, picking a target to "whistleblow" against, 'pick a target that is actually doing something wrong' is probably very high on the list of criteria.

They're going to want to do this again. They need to preserve their brand, "the guy who busted Madoff and wrote a best selling book about it" is a really valuable brand.

conistonwater• 7 years ago

The alternative viewport by Hempton is valuable, but I think the ad hominem against Markopolos is not. That's not how short-selling even works anyway. Could you please discuss it on merits instead?

arrty88• 7 years ago

Looks like he’s willing to put his money where his mouth is.

darawk7• 7 years ago

The fact that he's shorting GE should probably give you more confidence that he's right. That demonstrates skin in the game. He's not just speculating idly - he's putting his own assets at risk in the bet.

arbuge2• 7 years ago

It seems to me he is being paid by hedge funds to come up with research that supports their short positions. I see no evidence anywhere that he's shorting them using his own personal funds and even that would not necessarily give me any additional confidence he's right.

With your logic one might also claim that promoters of pump-and-dump schemes should be commended for having skin in the game.

bduerst6• 7 years ago

You can profit from shorting and be completely wrong.

All you need to do is convince the market that you're right long enough for the price to drop and cover your short.

taurath• 7 years ago

He’s putting his reputation up against it, which apparently is powerful enough to make the stock slide. He makes money either way (since correctly seeing he can move the stock price), the question is whether he comes out of it with his reputation.

Ididntdothis2• 7 years ago

It depends on when he closes the shorts. If he holds them I am fine but it’s also conceivable to buy shorts, publish bad news, see the stock drop and immediately close them.

manicdee2• 7 years ago

Are the people shorting Tesla right about EVs being useless?

makomk2• 7 years ago

Wow, that comparison with Madoff's returns is so sleazy that the person who created that image has to know they're being a dishonest scumbag. For context, the suspicious thing about Madoff's returns wasn't just the size of the returns, it was that his Ponzi scheme returned that amount consistently year after year, seemingly risk free, regardless of what the markets did. That was the part that was "too good to be true" - the average returns of Madoff's scheme were pretty unremarkable. Also I'm pretty sure that's comparing apples to oranges, or rather return on investment with profit-to-income ratio.

Gibbon12• 7 years ago

returned that amount consistently year after year, seemingly risk free, regardless of what the markets did.

Reminds me of something someone pointed out. GE hit it's quarterly numbers to the point for 20 years under Jack Welch.

http://www.robwalker.net/contents/mm_welch.html

athrowaway3z• 7 years ago

That's not an 'alternative' viewpoint. Reading the headline already told me he was shorting the stock. An alternative viewpoint would be: All the numbers add up and we expect growth.

georgeecollins• 7 years ago

As has been pointed out by others, the alternate viewpoint is from a GE shareholder.

https://whalewisdom.com/filer/bronte-capital-management-pty-...

Ididntdothis2• 7 years ago

GE should be a warning for all management gurus. I still remember when Jack Welch was the idol of all managers and I read a lot about how GE was grooming the next generation of super managers. Turns out that Welch didn’t really create a company that could perform with excellence in the long run. Seems he was more of a one hit wonder.

projektfu• 7 years ago

Actually, I'd say he was more of a fraud. It's been well known that under his administration GE earnings growth was basically linear and returned to typical volatility after he left, suggesting he was manipulating the figures to make it work. Meanwhile the company had sold off most of the businesses it was known for with the exception of light bulbs and aircraft engines.

crb002• 7 years ago

Wow. Given CNBC is owned by GE.

seren• 7 years ago

It was, it has been sold by GE a long time ago (at least 5 years). Maybe some of the staff still feels some sort of loyalty (or relief) I don't know but there is no reason now that CNBC should be more harsh or gentle on GE news.

Madoff whistleblower Harry Markopolos calls GE a ‘bigger fraud than Enron’

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