The flat-out silly Markopolos GE report
Courtesy of by John Hempton, Bronte Capital
GE is a deeply problematic company. It might not make it. And Harry Markopolos – the Madoff whistleblower – has put out a report on GE.
The report is highly negative and I believe utterly misleading.
This report focuses on the Long Term Care business.
That business is:
a) both having reserving problems and
b) is for good reason the best performed Long Term Care business in the world.
Long Term Care – the business of insuring people against the need to go into a nursing home – has hurt everyone who touched it.
GE used to own Genworth – and when they spun it out they reinsured Genworth's policies. Those reinsurance contracts have bitten GE pretty hard. But they were – by the standard of Long Term Care policies really well underwritten.
I wrote a blog post a few years ago about how those policies were written. Read it and the ask yourself how valid is Markopolos's comparison with other companies:
Strangely and just to prove poor Harry's incompetence one of the companies he compares GE's business to is Genworth. This is bizarre. GE reinsured Genworth. They are the same policies.
But outside Long Term Care is where the report gets really silly. Here is a slide comparing GE's industrial margins to Madoff returns:
He states GE Industrial Margin of 14.7 percent is "too good to be true".
Let's give him some comparisons:
I guess all of these are "too good to be true" too. Indeed the entire high-end of US manufacturing is worse than Madoff, if you believe Mr Markopolis.
I think the alternative is more likely. Say what you will, GE remains the unequivocal leader in medical imaging technology and the unequivocal leader in jet engines. In both these there are very few competitors and it would be near impossible to eat into GE's lead.
My guess – and it is a guess – that over time GE's industrial margin goes back towards the upper-end of the above-mentioned comparables.
Harry's report is silly. The market should ignore it.
For disclosure: we are long a little bit of GE with the emphasis on "small". GE is a problematic company and a zero is a possibility. However the Markopolis report is not an accurate guide to GE's problems.
