Here's an interview with Harry Markopolos, whose team just published a 175 page report alleging serious accounting fraud at GE, one of the biggest and oldest companies in the U.S..
This blog was set up mostly to share ideas that would help people either start a new business, or build small businesses. The blog is also to share my ideas on the Big Picture of our world, our economy, and where I see things going from that perspective. Since I was a little kid, I've been fascinated with trying to figure out what the future will be like. I wasn't a kid dreaming about interstellar space travel or sci-fi stuff. It was more that I just kind of naturally looked into the future, and wanted to figure out what the world would be like then, so I could kind of plan my life accordingly. OK, my life got derailed, basically, but I'm still a futurist.
When I moved to Southern California in 1986, with my first real job at a couple of BMX magazines, at age 20, the real estate market was rocketing up. Everyone was talking about real estate, and I started watching the "get rich in real estate" infomercials every Saturday morning. Initially that started as just wanting to make a bunch of money as a young gu,y so I could pretend to be cool and get laid a lot, like most young guys dream of.
But it later turned into a fascination with economic trends, market trends, social trends, technological trends, and trying to figure which were most important when looking into the future. Which of the thousands of economic and social forces out there were most important for figuring out where the world was really going? That's what I was trying to figure out. I began to watch the stock market day to day, and see what happened, and then try to figure out why it happened. I read a lot of books on real estate, and then other business books, and kept reading and self-educating for the 30 years since. My life has gone to some crazy places, and I was never to fully financially take advantage of what I've learned in these areas.
Over the last few years, after the economy had grown after The Great Recession, I began to wonder when the next recession would come along, and what it would look like. As I looked deeper into this, I found this crazy convergence of a whole bunch of super long term trends, traditional trends, and completely new factors. It became apparent to me that this next financial downturn would be worse than 2008. If you want to get a better idea of the weird array of trends and forces I look at, go back and read the last post.
In any case, as we get closer to the critical points of this next downturn, I knew there must be some company out there that would play a role similar to the role that (the now long gone) investment banks Bear Stearns and Lehman Brothers played in 2008. The economy had been in trouble for months, and big bubbles were getting ready to pop, when Bear Stearns suddenly went belly up in March of 2008. That really shook people up. The sub prime mortgage crisis was a huge factor in this collapse, but not the only factor.
But the economy trudged along after that, or seemed to. The stock market managed to go up for a couple of months afterward. Then things really started to unravel, overleveraged positions hit sketchy and over confident investors hard, and in September 2008, the 158-year-old investment bank, Lehman Brothers, went bankrupt. That collapse hit the financial world like a 9.0 earthquake, and the U.S. economy, and much of the world's economy, went into a horrible collapse.
Much of the U.S., primarily rural areas and small towns, have never really recovered. The stock market began to trend upward in early 2009, but the collapse in share prices took millions of people's retirements, and large portions of their wealth. Average investors were gun shy, for good reason, about buying stocks again. Now we're in the verge of a similar crisis, one that looks to me like it will be much worse than 2008, in the long run.
So as I was wondering what company out there had been doing shady stuff to make its numbers, and wondering who might become the "Lehman Brothers of this crisis," this major report drops yesterday, alleging massive accounting fraud at GE. I read the first two pages (of 175) of the report yesterday, and that gave me the impression that these allegations were very serious, and not just some random guy making stuff up. I just listened to this interview above, and now it seems even more serious. It looks like GE is in serious trouble. So here are the things I find most interesting about all this.
"Seven and a half months of our own time and money, no one paid us to do this."
-Harry Markopolos in the interview above. His team gets paid later in three ways, the SEC whistleblower program, the Dept. of Justice, and things like the arrangement with a hedge fund that's been mentioned.
-Harry Markopolos and his team self-financed this report. The unnamed hedge fund didn't pay them to take on this project. One way they will get paid back is by the SEC whistleblower program, years from now. That means that at the beginning of this 7 1/2 month project, they thought there was enough wrongdoing to be found, to make it worth the while to take this project on. That means they really thought there was a lot of wrongdoing to find.
-Markopolos was the guy who discovered the Bernie Madhoff Ponzi scheme fraud, a story that broke back in 2008, a scheme that followed a lot of sophisticated investors for many, many years. You can get a brief version of the story here (it even mentions Markopolos). So Markopolos and his team are no joke, they know how to find shady accounting and fraud.
-Markopolos and his team discovered issues with GE's long term care insurance while investigating another insurance company, it wasn't like they just said, "Hey, let's take out GE." There had been rumors about shadiness at GE since the 90's, and when they learned how the other insurance company cooked its books, it looked like GE may be doing something similar, which encouraged them to look into the company in a more in depth way.
-There are things this investigative team found that are not in the report, and went straight to law enforcement. So they found evidence of illegal actions, serious enough to justify a serious look, and likely other investigations, by some level of law enforcement.
-Mr. Markopolos is smart and well informed on camera, but he's obviously not a professional on air personality. As someone who's worked in TV years ago, I think that comes across in the interview. He's all about the facts, he knows what he can and can't say, but he's just laying the facts out. If this was a well planned public relations (aka P.R.) campaign, and the point was just to manipulate the stock market, or even to destroy GE, this would look completely different. And... the guy's on Yahoo Finance, which, let's face, nobody watches most of the time.
In a major P.R. campaign, there would be several people on multiple, major business networks, all of them would be very good looking and very good at speaking on camera, and would be repeating the same talking points over and over. In other words, it would be the kind of mass propaganda we (well maybe you, I don't watch full scale propaganda as a rule) see every day on some news networks.
The real P.R. campaign, the organized response by a team hired by GE, no doubt, has kicked off today (the day after the interview above), with business news quoting Goldman Sachs "experts" and others. If you want to know the truth about anything financial, the last "expert" you listen to is one from Goldman Sachs. Hey, they do know finance, that's for sure, but they're the company whose people move often into government positions to work directly on behalf Wall Street and Big Business, creating policies to help them.
So, in my humble opinion, these really are some serious accusations, and my bet would be on longtime corporate giant, GE, going bankrupt in 2-6 months or so. I think the ultimate amount of fraud found will go far beyond the $38 billion alleged by Markopolos and his team. He says he thinks what they've found is just the tip of the iceberg, I'm beginning to think he's right about that.
This leads to the next question, what is GE these days? GE is a huge corporate conglomerate that started in 1892. The company, according to Wikipedia has 283, 000 employees, so there may be a slight surge in resume's on Indeed next week. And next month. And next year. To put that workforce in perspective, GE has more employees than the combined populations of Dayton, Ohio, Norton, Ohio, Massillon, Ohio, Coshocton, Ohio, Mansfield, Ohio, Shiloh, Ohio, Willard, Ohio, and Carlsbad, New Mexico. Those are eight of the cities I lived in growing up, because my family moved too damn much.
GE has a whole list of subsidiaries, most of the names of which start with "GE." Not too creative, definitely not as creative as their bookkeeping is alleged to be. You can check out the subsidiary list here. GE had an annual revenue of $121.6 billion in 2018, and an operating income of $ -20.72 billion. (Well THERE'S your problem.) They are also listed as having assets of $309.129 billion.
If these allegations prove true, which seems likely, the future trouble of GE is going to affect A LOT of people in a lot of places in a lot of industries. After doing the basic research for this blog post, I think the issues apparently troubling GE could go well beyond a "Lehman Brother" incident. With their huge workforce and operations all over the world, this looks more like the makings of an AIG-type crisis, because the ripple effects of big trouble at GE will be astronomical.
In the meantime, expect GE to officially deny everything in public, and to see lots of pro-GE interviews and articles in the business media, if you watch the business media. That's the P.R. campaign to make things look fine, while the top brass at GE tries to find out what's really going on, and how bad things might actually be there. Most importantly, the top executives need to try to keep there asses from getting hit with criminal charges, and to get out with tens of millions in golden parachutes. On this website, we can see that six top executives at GE get $7 to $16 million a year in compensation, as of fiscal 2019.
We'll see what happens, but it appears that revelations of trouble at GE are just getting started. If these troubles do turn out to be true, there will massive ripple effects throughout the business world, and U.S. economy. Another question is, are there other companies out there that have been doing shady stuff, or have been using far too much leverage to try to optimize profits? Undoubtedly, there are. Are we going to see other large companies getting into major troubles as we head into the next recession, whenever it starts? It's likely we are. One really big company going bankrupt could spark a collapse, something like 2008, and now 125-year-old GE, the former General Electric, is a company to keep an eye on in the next few months.
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