General Electrified

If Jeffrey Immelt felt unlucky to take over General Electric from living legend Jack Welch just four days before the September 11 atrocities, he can only blame himself for allowing financial services to become such a large part of the mega-conglomerate. GE may remain, for now, one of only six triple A-rated US companies, but the markets are trading it like junk as fears over its GE Capital unit mount. GE’s shares are down nearly 60 per cent this year and each soothing word it gives investors seemingly is having the opposite effect.

At Wednesday’s close, for example, all of GE was worth $6.69 a share even as an analyst from Deutsche Bank estimated that its industrial units alone, responsible for half its earnings recently, were worth around $12 on their own. GE is a leader in areas such as aircraft engines, medical equipment, and power and water infrastructure, businesses that will suffer in a recession but not vanish. The implied value of its financial arm of negative $56bn seems irrational, but perception is often reality in today’s jittery markets.

GE is better-positioned to weather the financial storm than most purely financial firms and it has already taken many steps to raise equity, conserve cash and shore up finances. Aside from an expected credit rating downgrade, there are few exogenous events that pose an immediate threat. Still, it is playing its relatively strong hand poorly. Touting “ample liquidity” or “excellent assets” have been the famous last words of too many executives lately. Vague reassurances over landmines in GE Capital such as a huge commercial real estate portfolio and heavy credit exposure in the UK and eastern Europe are unconvincing. Perhaps its size and credit rating have made it too arrogant. Unlike more fragile peers, GE can afford to come clean about risks and amass enough capital to dispel completely any fears over a catastrophe.

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