The Earnings Bomb Inside GE Capital (GE)

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The Earnings Bomb Inside GE Capital (GE)
Henry Blodget|Apr. 9, 2009, 10:54 AM

GE (GE) gave a presentation a few weeks ago designed to calm investors' fears that the company's huge financial services division, GE Capital, is just another Bear Stearns with a friendly logo.  The presentation helped, and GE's stock has recovered some of its horrific losses.  As of this morning, it's back above $11 (down from $40+ 18 months ago).

Some investors, however, are not convinced.  The inimitable Steve Eisman of FrontPoint Partners, for example, who was immortalized last year in Michael Lewis's article about the end of Wall Street, detailed his thoughts about GE at Jim Grant's annual conference a few days ago.

An investor in attendance was kind enough to forward Steve's slides, and we've excerpted some of them below.  Here's his bottom line:

GE Capital is currently hiding $40-$45 billion of embedded losses in the GE Capital portfolio.  This $40-$45 billion of losses, if rinsed through the income statement all at once, would wipe the company out.  In fact, if GE weren't able to fund itself with the "heroin injection" of the government's commercial paper program, it would already be bankrupt.

So is GE toast?

No. Unlike banks, GE is not required to mark its assets to market, so Eisman thinks the company will just hobble along for years as the bad news gradually works its way through its income statement (the very definition of a zombie bank).  The losses will hammer GE's earnings, though.  Especially as the performance of the industrial business deteriorates.

http://www.businessinsider.com/henry-bl ... -ge-2009-4

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