"GE is so big, every time its shares drop a point, that is a $10 billion loss in shareholder’s funds."

Chicken Little: General Electric


Just about two years ago, I was sitting in a quaint coffee shop near my country home, one of those places with framed pictures of old flour bags and signs that might have come from a 19th Century grocery store on the wall, the country alternative to Starbucks, when I became fascinated by the guy at an adjacent table working studiously over spread sheets, what appeared to be corporate annual reports, 10Ks, 10Qs and prospectuses.

What, I asked him curiously, was he up to?

With some reticence, and establishing my bona fides he explained that he was planning a report to show that General Electric stock was vastly over-priced and heading for a fall.

I smiled, and explained to him that obviously he was under sort of vast misapprehension. GE? Saluted by the business magazines as one of America’s best-managed companies, whose former chairman had written a book about management that was a bible to the students in business classes? GE, a diversified company that was known to make everything from kitchen “white goods” to engines for jumbo jets to train locomotives? GE, considered so fundamental to the American economy that it was the only surviving company of the original DJIA?

I found the man sharing my coffee and quiche had impressive credentials. He was Charles Ortel, a Harvard MBA, former managing partner at a leading investment bank who’d put together major deals, and who had left the corporate world to send his kids through prep school and at the same time, stop to smell the roses.

And he was adamant that the reports that GE was handing out to the financial world were chimerical.

Partially convinced, I sent a “tip” to one of the world’s most prominent financial editors, a journalist who had uncovered one scam after the other — those “worldwide” satellite-powered cell phones that eventually almost broke their maker who had to pull the satellites down, accounting scandals that he help populate white collar prisons.

I could almost hear his guffaw over the Internet. GE heading for the wall? No way.

At the time — to take a starting point I have reached back to August of 2007 — General Electric stock was selling at 39, was in everybody’s portfolio except that of Bernie Madoff. A blue chip stock. Put it in the portfolios for widows and orphans.

Since then, the stock had dived to 6, and last week was selling at 13. Understand that GE is so big, every time its shares drop a point, that is a $10 billion loss in shareholder’s funds.

There are currently a half dozen books about to be on your Amazon must read list explaining GE was so grossly over-priced, all singing the same anthem:

GE may have been this “diversified” company, but if you carefully looked at their books, and their liabilities that were carried “off balance sheet,” most of the company’s growth in profits was coming from financial services subsidiary in London employing a fraction of the company’s payroll, underwriting risky investments like sub prime mortgages.

All of their risks had been skillfully explained away by statisticians’ analyses that while some of the holders of these lousy mortgages would default, in the main, the rising housing market and the integrity of the people who held the mortgages would mean there was no risk.

Remember, this was before the time anybody but a couple of bankers had heard the expression “sub prime” and a TARP was something you used to cover the compost pile.

Of course, following the old Celtic adage that “Success has a thousand fathers, but failure is an orphan,” the author of each of these tomes now claims to have been chicken little warning the GE sky was about to fall.

But Ortel is the first person I ever heard forecast it, and at least two of the country’s most prominent financial journalists whose ear I whispered into that the sky was about to fall on GE, where the authors of this “I told you so” books sit in the newsroom, were mirthful in their skepticism.

When he began predicting what was going to happen with GE stock, Ortel didn’t even have a business. Now he has formalized his endeavors into an investment advisory company called Newport Value Partners. The people who listened to his counsel 24 months ago and sold short on GE, bought credit default swaps that would pay off if the company tanked, who took all of the steps to legally and carefully bet that General Electric stock would dive… Well, I expect they are the folks buying the real estate and yachts being sold by Madoff investors.

Is there a moral in this story?

I think it is this:

The people sitting in those boardrooms, drawing down those big salaries and bonuses, assuring you that there is no risk in betting the farm on subprime mortgage and other “derivatives” so complicated that they are the only people who can understand them, are not necessarily much smarter then Mr. Jackson, your high school economics teacher, and the next time an Ortel or other skeptic tells you that a major company is not what it appears to be, it might pay to listen up.