GE shares take another tumble as fall from grace continues

Friday, 16th August 2019 12:01 - by Shant

Shares in GE took another tumble yesterday after an investigator who unraveled the Ponzi scheme initiated by Bernie Madoff warned of 'hidden' liabilities within the company's accounts related to its insurance business and the acquisition of its stake in Baker Hughes, the oilfield service provider.  

Harry Markopolos issued a 175-page report alleging GE had concealed around $38bln of total liabilities, referring to the accounting practices as 'fraud'.  He has also since been quoted saying that he believes GE is a bankruptcy waiting to happen.  However, his warnings have been met with stern criticism from the GE board, with Markopolos providing an advanced copy of his report to a hedge fund, seeking a share of profits from any resultant market positioning and moves.  Naturally, this has drawn further ire from the GE top brass, with Chief Executive Larry Pulp calling it nothing short of 'market manipulation - pure and simple'.  

The bulk of the risk highlighted in the report is down to the long term care insurance. As has been an industry-wide problem, companies have underestimated the costs as people have both (naturally) aged and indeed live longer.  The report from Markopolos says GE has underfunded reserves for future healthcare, leaving a shortfall of $9.5bln, which in some cases is as much as 25% less than the industry average.  Markopolos says that policyholders (past and present employees) ultimately lose out, while front line profits are enhanced to the benefit if the 'fat cat' executives.  Markopolos is certainly pulling no punches here, and added that the degree of fraud surpassed that of 'Enron and WorldCom combined'!  

It was no surprise then that the shares in GE plummeted on Thursday, shedding 11.3% on the day, though would have been more if not for reported buybacks, at the behest of Chief Executive Pulp.   At the lows of the day, share prices hit $7.65 but ended the day a little over 50 cents above this level.  Even so, these levels are a far cry from those seen just over 3 years ago when the stock was trading at over $30 a share.  Risky acquisitions and poor performances leading to a number of changes at the top have made it a torrid time for one of the US leading names.  If this latest story gains traction, then shares could be headed down towards the lows seen in the aftermath of the credit bubble in 2008, with shares hitting $5.56 at the time.  Beyond that, pre-1992 prices beckon, resulting in a fall from grace which may well see Markopolos's predictions face reality.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.