The sub-prime problem is Kryptonite to GE.
I’ll get to that in a minute, but before I do, a brief review. Last week, I questioned CNBC’s embarrassingly softball interview of GE CEO Jeff Immelt. As noted, it would have behooved Immelt to demand his reporters ask him tough questions in order to protect the NBC/CNBC brand.
I suggested ordering the anchors not to go soft on him: "I
expect you to maintain our reputation as the pre-eminent business news
channel, and if you are too soft on me, it costs the company its
reputation. Ask me tough questions. Raise difficult issues. Challenge me as if this were 60 Minutes. Anyone who pulls their punches or throws me a softball question is fired."
That did not happen.
Now, less than a week later, both the WSJ and the NYT are questioning GE’s strategies. And even more intriguingly, analysts are rethinking their decade of unswerving support about this whole industrial conglomerate thingie.
As is so often the case, many of the fundie guys completely miss the point. They seem to barely get just why GE missed so badly this quarter. Even worse, they misunderstand how GE was such a wonderfully consistent and predictable beat-by-a-penny machine for so long.
The answer to both of these issues can be summed up in two words: GE Capital.
Over the years, GE Capital was this wonderful black box straight from planet Krypton. It had super powers under the Earth’s yellow sun that other merely mortal companies did not. Jack Welch played the role of Superman, with an ability to make this enormous global conglomerate meet or beat every quarter, regardless of economic conditions. His unearthly powers were unmatched by other companies.
Transparency? Ha! No analyst ever really knew what was going on in there. It was a highly leveraged hedge fund, but that never really mattered, just so long as GE kept up the illusion that these profits were the result of ordinary industrial — rather than leveraged financial — operations.
Unfortunately for Immelt, he is facing not just a run of the mill domestic slowdown, but a much more important problem for GE: The credit crunch and subprime debacle. This has hamstrung GE Capital’s ability to pull a penny or two out as necessary.
In other words, sub-prime is Kryptonite to GE. Not only has it lost its ability to fly and repel bullets — i.e., beat every quarter, regardless — but it actually weighed the company’s earnings down with its losses.
Jack Welch went on CNBC yesterday, and again today, to defend the GE conglomerate model; it was a futile effort to those who know how GE managed their earnings for so many years during the Welch regime. His appearance only served to remind viewers of how wonderful life was when Jack’s magic black box had all its superpowers. Even worse, Immelt is stuck with a superhero — but no superpowers.
GE Capital has been exposed to Kryptonite, and as everyone knows, when exposed to particles of its home planet, Superman becomes powerless.
As has GE Capital. . .
Surprise: Gee! No, G.E.
G.E.’s Shortfall Calls Credibility Into Question
NELSON D. SCHWARTZ and CLAUDIA H. DEUTSCH
NYT, April 17, 2008
Embattled GE CEO Defends Strategy
Immelt Scolded By Welch on TV; Appliance Sale?
KATHRYN KRANHOLD and CAROL HYMOWITZ
WSJ, April 17, 2008; Page A1