Since April 4th, 2008, the stock of U.S-based 'super conglomerate' General Electric (GE) has been in an absolutely vicious, nauseating downtrend falling from $37.56 a share to today's difficult-to-fathom price of just $7.06/share (FYI, please note the fitting JOKER-like portrait of GE CEO Jeff Immelt above). GE, a once near $600 Billion GOLIATH of a company, has been crushed by the simultaneous burstings of the REAL ESTATE and CREDIT asset bubbles and seen its market value shrink a jaw-dropping 80% over the past 11 months!The reason for the steep, GUT-wrenching decline??? The vast amount of Joker-like UNCERTAINTY surrounding the value of General Electric's ENORMOUS and OPAQUE
$650 Billion GE Capital business, and more specifically, its $50 Billion plus global REAL ESTATE portfolio. For some perspective, the size of GE Capital is roughly equivalent to the size of the U.S's 6th largest bank.
Further complicating matters is the Joker-like accounting methodology GE Capital currently uses to value its holdings. The world's largest maker of jet engines and power turbines told shareholders last week that only 2% of GE Capital Corp's $650 Billion portfolio of assets are being valued today based on current market prices (i.e: marked to market). According to CreditSights Inc, an independent bond research firm based out of New York, the remaining 98% or some $624 Billion of GE Capital assets (most of which are loans or senior secured debt tied to assets like aircraft) are being valued at levels that General Electric established many years ago! Per the bottom referenced Bloomberg link, here are some quick facts related to GE Capital's dubious real estate unit, GE Real Estate :
* GE Capital generated $8.6 Billion or 48% of General Electric's $18.1 Billion of profits in 2008...that compares with about 20% in the late 1980's...General Electric expects GE Capital to contribute $5 Billion of profits in 2009
* GE Real Estate profits fell by $1.1 Billion in 2008 (vs. 2007)...On January 23rd, 2009, GE stated that GE Real Estate will take more than $4 Billion in pretax losses and post an overall loss of about $500 million in 2009
* According to SEC regulatory filings, General Electric's commercial real estate business consists of both property and real estate loans. The company has stakes in or financing on 8,000 different properties scattered in 2,600 cities with an average investment of less than $10 million
* According to Keith Sherin, General Electric's Chief Financial Officer, GE has about $50 Billion of commercial real estate loans and $2.9 Billion of commercial mortgage-backed securities
* GE takes a conservative (...ironic that shareholders should actually read this word as 'DANGEROUS'...) approach in terms of accounting for the value of its real estate holdings as the company's 'mark to market' methodology is similar to the accounting used by real estate investment trusts. GE accounts for its property holdings at the price they paid for them and then chooses to depreciate the values over time rather than actually marking the assets to their current market values. According to GE spokesman Russell Wilkerson, GE's property portfolio currently generates about $1.7 Billion in profits while the company depreciates the assets by about $1.1 Billion per year. GE is currently forecasting loan reserves of (only) 2.5%.
* GE's property includes office buildings, warehouses and apartments...about 71% of GE's properties are located outside of the U.S., primarily in Europe, Asia, Canada and Mexico
* GE owns about $22 Billion of real estate assets in Europe...about 1/3 of which consists of real estate debt and non-performing loans
* In November 2007, GE purchased $2.8 Billion of commercial real estate loans from England's Bradford & Bingley. According to Investment Property Databank, U.K. commercial property values had fallen only 3% from their July 2007 peak at the time of GE's purchase...now prices have fallen 37% from that peak
* In 2006, GE purchased Arden Realty Inc. for $3.2 Billion...at the time, Arden was the largest publicly traded land owner in Southern California
bloomberg.com/apps/news?pid=20601109&sid=ary2g22
Data Courtesy: Bloomberg
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