The GE Culture

• Notions on High and Low Finance (NYT Blog) – Floyd Norris: Lessons of G.E.
  G.E. had a reputation of being a master at meeting the numbers, something its bosses were confident they could do only a month ago. So you have to figure that something really bad happened in the final few weeks of the quarter. It is in that regard that G.E.’s blame of Bear Stearns for the failure makes sense. In the earnings call, G.E.’s bosses talked of the inability to complete planned end-of-quarter transactions. I suspect a purpose of those transactions was to produce the reported profits needed to make the numbers. . . . No one should be shocked by signs of weakness in the financial sector, and I doubt any of the analysts are surprised by that. What has surprised them is the inabilty of G.E. to do the earnings dance. In that light, the bearish case is that G.E.’s miss signals that the rot is deep. The bullish case is that the Bear Stearns fiasco provided only a temporarty setback at a critical end-of-quarter time. Three months from now, we may get indications as to which view is accurate.

Comment The red highlighted passages above suggest that GE has an extraordinary ability to “meet” earnings. As Jack Welch once explained in his book, Jack, Straight From the Gut (2001 edition):

Page 224
I was getting ready to leave the office for a long weekend on Thursday night, April 14, 1994, when Mike [Carpenter, Head of GE Capital] called with one of those phone calls you never want to get. “We’ve got a problem, Jack,” he said, We have a $350 million hole in a trader’s account the we can’t identify, and he’s disappeared.

Jack continues:

I didn’t yet know who Joseph Jett was, but over the next few days I would learn more then I cared to about him. Carpenter told me that Jett, who ran the firm’s government bond desk, had made a series of fictitious trades to inflate his own bonus. The phony trades artificially boosted Kidder’s reported income. To clean up the mess we would have to take what looked like a $350 million charge against our first quarter earnings.

The quarter had ended and Jack was given the bad news that GE was going to miss its numbers. What was Jack’s response?

The news from Mike made me sick: $350 million, I couldn’t believe it. It was overwhelming. I rushed to the bathroom, and my stomach emptied in awful spasms.

Let there be no surprise, the “GE culture” is all about beating the street’s quarterly estimates by a few cents. What makes the head of GE throw up? Products that kill? Laying off employees? Bad strategic decisions? Apparently not. What makes him throw up is missing street estimates by a few cents. His division heads understood this and would go to any length to prevent it from happening.

Page 225
That Sunday evening, I called 14 of GE’s business leaders to deliver the bad news and apologize to each of them for what had happened. I felt terrible, because this surprise would hit the stock and hurt every GE employee. I blame myself for the disaster.

The previous year, 1993, when Jett’s phantom trades accounted for nearly a quarter of the profits made by Kidder’s fixed income group, Jett had been named Kidder’s “Man of the Year.” We had approved Mike’s request to give Jett a $9 million cash bonus, a huge award even for Kidder. Normally, I would have been all over this. I would have dug into how one person could have been so successful, and I would have insisted on meeting him.

The response of our business leaders to the crisis was typical of the GE culture. Even though the books had closed on the quarter, many immediately offered to pitch in to cover the Kidder gap. Some said the could find an extra $10 million, $20 million, and even $30 million from their businesses to offset the surprise.

Please re-read the last highlighted passage. It sure sounds like Jack just described SEC and FASB violations as an integral part of the GE culture. Isn’t this why we created Sarbanes Oxley in 2002, to stop such cheating?

Why bring this up? Because Jeff Immelt’s comments on Friday sounded eerily like Jack Welch 15 years earlier. People are not surprised by the loss because of financial market turbulence late in the first quarter, but rather the failure to hide these losses through accounting manipulation.

Can we trust any of the numbers from “The House That Jack Built?”

• Mock The Market (Blog) – 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.

• Barron’s – At GE, One Bad Quarter Doesn’t Spoil the Story
  GE shares tumbled 4.70 points Friday to 32.05 — a 13% decline and the worst one-day percentage drop in the stock since the 1987 market crash. The plunge is understandable, since GE’s profits rarely fall short of the Street’s expectations and the first-quarter profit miss was significant. GE earned 44 cents from operations in the period, down 8% from 48 cents in the year-earlier period, and seven cents below the consensus estimate of 51 cents. GE now expects to earn $2.20 to $2.30 a share in 2008, below the prior consensus of $2.43. The new guidance from GE calls for zero to 5% growth in profits relative to the $2.20 that the company earned last year, which was up 18% from 2006. A chastened Immelt said he was “disappointed” with the results, which largely reflect a shortfall at GE’s huge financial-services unit, General Electric Capital Services. The earnings-miss came less than a month after Immelt reaffirmed GE’s ’08 guidance of at least 10% earnings growth, and six weeks after he personally spent $5 million to buy GE shares in the open market at about 33 a share.