Quoted Text

Don’t blame Immelt for GE earnings drop, blame Jack Welch

    This is regarding the April 17 article “Welch expresses perturbation with Immelt: Welch raps Immelt on missing profit targets.” GE’s former CEO Jack Welch was perturbed that his successor, Jeffrey Immelt, missed the earnings target for the first quarter of 2008. Welch threatened to “get a gun out and shoot” Immelt — figuratively, I’m sure — if earnings targets are missed again. Welch’s criticism is hypocritical because he is responsible for making GE vulnerable to downturns in the financial markets.
    The missed target was caused by a 20 percent earnings drop in GE’s commercial financing unit in the wake of the Bear Stearns meltdown. The collapse of Bear Stearns cost GE $270 million in write-downs on loans and investment securities at the end of the first quarter. GE’s vulnerability in the volatile financial services businesses is the result of Welch’s transformation of GE from mainly industrial/manufacturing to aGE where fi nancial services account for half of its earnings.
    Financial services businesses are valued less by Wall Street because of their volatility and, as recent events have shown, performance and the quality of the reported earnings cannot easily be measured by analysts. Welch used the lower valuation of financial services companies to raise the GE stock price by acquiring many insurance and financial companies.
    It worked like this: The combined earnings from the traditional GE businesses and the acquired financial companies received the higher price-earnings (PE) ratio accorded to industrial businesses. The GE stock price kept going up as Welch continued his acquisitions of low PE companies until about 50 percent of GE’s earnings came from financial services. GE became one of the largest non-bank lending institutions.
    But there is more on how the GE stock price was manipulated. Welch’s financial acquisitions included insurance businesses, which became the former GE Insurance Solutions unit. Welch took credit, and was grotesquely compensated, for increasing GE’s earnings from 72 cents to $1.37 a share during his last five years as CEO. However, 61 out of the 65 cents increase in earnings were due to a $9.4 billion insurance-reserve deficit. Immelt was forced to correct this massive under-reserving at its reinsurance unit before he was able to sell the unit to Swiss Re at a loss of billions.
    Welch tried to sell GE Energy, including the Schenectady operations, to Siemens because he didn’t like the business and Schenectady. Let’s return to the performance of GE’s operations for the first quarter of 2008 and compare them to the first quarter of 2007. Earnings from GE Energy rose 32 percent in contrast to the businesses Welch favored and acquired: GE Real Estate down 16 percent, GE Money down 19 percent, and GE Commercial Finance down 20 percent.
    MARK MARKOVITZ
    Niskayuna