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Capital Unit's Stumble Puts GE At Risk

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Capital Unit's Stumble Puts GE At Risk


Capital Unit's Stumble Puts GE At Risk

Capital Unit's Stumble Puts GE At Risk

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

General Electric is an iconic and venerable American corporation, but its stock price has plummeted as investors worry about looming losses at GE's financial division. Top executives spent much of Thursday trying to convince investors that the company isn't on the verge of calamity.

Aside from light bulbs, appliances and entertainment via its NBC Universal unit, GE makes all sorts of stuff you don't see, including airplane engines and the equipment inside of nuclear power plants. It also built the controls inside of the Panama Canal.

For years, GE was considered the pinnacle of successful American management. During the 1980s and '90s its then-CEO Jack Welch gained hero status among many in the business world.

But right now some analysts think GE is in serious trouble. It recently cut its stock dividend to raise money after promising investors it wouldn't do that. Its stock price took a massive dive earlier this month — to around $6 a share, from around $40 a year ago.

"Well, to see GE taken apart down to $6 a share was a remarkable event because it is such a global, diverse company," says David Kotok, chief investment officer of Cumberland Advisors.

The stock has come up sharply off that low, closing above $10 on Thursday, but it's still down about 70 percent from a year ago. What does it mean for the whole U.S. economy if investors are panicking about a company like GE?

"GE touches so many different facets of American industry," says Richard Hofmann, an analyst with the research firm CreditSights. "You know, take heed and notice when you see a stock like GE going into a free-fall mode."

Risky Investments

But it turns out analysts like Hofmann are worried that GE is not actually so diverse these days. That's because over the years it has gotten heavily into financial services through its GE Capital unit.

"What's happened is this subsidiary has become such a large piece of the overall institution," says Matthew Kelley, a senior analyst at the stock research firm Sterne Agee. He says as much as half of GE's earnings have been coming from GE Capital in recent years and most of the company's assets are in GE Capital.

"It's almost 85 percent of the total balance sheet for GE," Kelley says. "It's an overwhelming amount of the asset base, the equity base."

He says GE Capital has been buying billions of dollars worth of office buildings and other real estate that's now falling in value. It also loaned out $27 billion for risky home loans in Europe, he says. And GE has become a major credit card issuer.

"They are the provider of credit for the Wal-Mart credit card, for example. I think the problem here is a ton of asset growth into riskier asset classes that is now coming back to cause problems," Kelley says.

In other words, he says, GE may have made a lot of risky bad investments that could cause the same kinds of big losses that so many major banks have been suffering. In fact, bearish analysts like Kelley are now looking at GE more like a troubled bank than the big industrial company that it has always been.

"GE Capital is really facing the same headwinds that we hear about every day from British banks, from U.S. banks, from European banks, and we believe that they will experience losses," Kelley says.

A 'Tough Cycle'

For its part, GE has been trying to downplay this scenario. The company spent five hours Thursday with Kelley and other analysts going over its financial situation.

"We expect GE Capital to be profitable in 2009," said Keith Sharon, GE's chief financial officer. "And when we come through this tough cycle we're going to be even better positioned from a competitive perspective."

Many analysts think the stock had fallen too far a couple of weeks ago, when it was around $6 a share.

"That was absurd," Kotok says, "unless GE was going to fall into a bankruptcy or a mode in which it was as wounded as a company like AIG. And GE is not AIG. And it's clear that the market has realized that."

Still, some analysts think GE, like many other businesses, got lured in by the profits in the global lending and real estate frenzy. Some say that easy money became part of the mortar supporting the larger company. And with that crumbling, they say GE's got a lot of shoring-up to do.

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