General Electric was caught up in a financial fraud scandal, and its market value evaporated by 63.1 billion yuan

Recently, General Electric was accused of financial fraud and was caught in a storm. On August 15, according to foreign media reports, accounting expert Harry Markopolos accused General Electric of covering up some deep-seated problems and providing regulators with erroneous and fraudulent financial reports in a research report, calling it "a bigger fraud than Enron."

General Electric was accused of financial fraud, and its market value evaporated by 63.1 billion yuan.
Markopolos released a 175-page report directly pointing out the problem of financial fraud at General Electric. In the report, Markopolos listed four major crimes of General Electric:

First, the company’s accounting irregularities involved an amount of up to $38 billion, equivalent to more than 54% of today’s market value;

Second, the company has an insurance reserve gap of US$18.5 billion;

Third, there are problems with the accounting methods of oil and gas business;

4. The operating capital situation is far worse than disclosed (source: China Business News).

Markopolos said, "My team has been analyzing GE's accounting issues for the past seven months, and we believe the $38 billion in fraud we have discovered is just the tip of the iceberg."

He believes that the scale of GE's financial problems exceeds the combined total of two famous American financial fraud scandals, namely the former US energy giant Enron and former telecommunications giant WorldCom.

Markopolos also said that GE has a "long history" of accounting fraud, dating back to 1995. He also set up a website for investors and the public to view the report. The news shocked the industry and GE's market value plummeted.

At the close of trading on August 15, GE's stock price fell 11.4%, and its market value evaporated by $8.98 billion (about 63.1 billion yuan). So who is Markopolos? Why is he so influential? According to reporters, Markopolos was an accounting expert who exposed Madoff's Ponzi scheme. Since 1999, Markopolos has reported Madoff to the SEC, but no one believed it at first. It was not until the subprime mortgage crisis broke out in 2008 that Madoff's "Ponzi scheme" was uncovered because the principal repayment of up to $7 billion could not be completed. Madoff was eventually sentenced to 150 years in prison and fined $170 billion. Markopolos also obtained the qualification of fraud examiner and became famous. In response to Markopolos's accusation, General Electric responded that the report was a malicious short-selling behavior. In a statement, GE said Markopolos worked for unnamed hedge funds that were often motivated by their own interests to try to short a company's stock and create unnecessary market volatility.

According to the latest news learned by the reporter, GE is currently cooperating with the US Department of Justice and the US Securities and Exchange Commission in their investigations into its accounting practices. After more than 20 years, Markopolos has pointed his finger at GE, and the two sides will once again stage a tit-for-tat battle. However, there are also institutions that support GE. Short-selling institution Citron Research strongly supports GE, saying that Markopolos' report on GE is the worst report and that it is hypocritical from beginning to end.

The business history of General Electric: from glory to the brink of collapse.
When it comes to General Electric, we have to go back to the era of the great inventor Edison.

In 1889, Edison merged his electric light company with several other companies to form Edison General Electric Company. The company established its first industrial laboratory in 1900 and changed not only the electrical appliances in American homes, but also the American lifestyle.

For most of the 20th century, GE remained just an appliance company, until Jack Welch became CEO in 1980, when the company was able to expand into more areas and become the global giant it is known today.

During Jack Welch's tenure, the company's business was drastically restructured, separating it from its domestic and manufacturing roots and focusing on global and diversified operations.

Among them, the business that has a profound impact on the development of GE is the financial services industry. Through Jack Welch's strategic planning, by the end of the 1990s, GE Capital became the engine driving GE's growth. Data shows that by 1998, the financial services business accounted for nearly 48% of GE's revenue.

In 2001, the year Jack Welch stepped down as CEO of General Electric, the company's market value exceeded $600 billion, ranking first in the world, and General Electric reached its peak. In just 20 years, Jack Welch transformed General Electric from an industrial manufacturing company with a turnover of $25 billion into a business empire with a turnover of $125 billion. The professional management system and decentralized reform measures he built became the standard for global imitation at that time, and this CEO was also known as the world's greatest management master.

In the same year, Jeffrey Immelt, Jack Welch's personally selected successor, took over as CEO. It was during his tenure that General Electric went from the peak to the brink of collapse, and the "culprit" was its financial services business.

In 2008, GE Capital's assets once reached US$538 billion, and its business involved almost all non-bank financial services such as commercial credit cards, leasing and reinsurance. However, with the outbreak of the global financial crisis, GE Capital also faced a serious liquidity crisis, and continued to lower its profit expectations in the second half of the year. Its stock price also fell by more than 40% during the crisis.

Dragged down by its financial business, the two major rating agencies, Moody's and S&P, successively downgraded GE's top rating in March 2009. This was the first time in 40 years that GE lost Moody's top rating. There were rumors in the market that this super aircraft carrier might go bankrupt soon.

In order to cope with the unprecedented crisis, the company had to restructure and optimize its assets to overcome the difficulties. Since 2013, GE has gradually divested most of its financial businesses, and announced in 2015 that it would divest its financial business assets with a total size of nearly US$300 billion, including GE credit cards, retail finance, real estate finance and other businesses.

But in order to maintain performance growth, Immel vigorously expanded other businesses, such as the $10 billion acquisition of Alstom's power business, $5.5 billion to buy Vivendi Entertainment, and $9.5 billion to buy a British medical imaging company. According to statistics, during the Immel era, GE completed more than 380 mergers and acquisitions, spending $175 billion, and also sold more than 370 assets with a total price of more than $400 billion.

Fortune magazine once wrote that General Electric's acquisition of Alstom's power division in 2015 was an extremely failed acquisition. When renewable energy became the direction of global investment, General Electric still invested in the traditional energy sector, which led to today's predicament.

Data shows that GE Power's profit plummeted 45% in 2017 after the completion of the merger. According to the performance figures released in the third quarter of 2018, GE Electronics' annual orders fell by 18%, revenue fell by 33%, and profits still fell by 16%, becoming a major drag on GE's business and further exacerbating GE's cash flow crisis.

Under pressure from shareholders, Immel had to step down in 2017, and his successor was John Flannery, who tried to save this commercial giant through a series of measures, including abandoning the "troika" businesses of power, aviation, and healthcare, splitting up the oil and gas service department Baker Hughes, and divesting at least $20 billion of non-core businesses, but the above measures still failed to save GE from its decline. In 2017, GE's stock price fell 45% in a year, becoming one of the worst performing stocks in the Dow Jones Industrial Average that year. Buffett, who spent $3 billion in 2008 to help GE through the financial crisis, also sold all of his GE shares.

In June 2018, General Electric was removed from the Dow Jones Industrial Average. Titanium Media (WeChat ID: taimeiti) noted that the company has been an original member of the Dow Jones Industrial Average since 1896 and one of the 30 components of the Dow Jones Industrial Average since 1907. This also means that the business myth created by General Electric over the past century has been annihilated at this moment.

Just two months later, General Electric announced the removal of John Flannery and his successor, Lawrence Culp. This overturned GE's more than 100-year tradition of selecting CEOs from within the company. Wall Street also had high expectations for this "paratrooper" who had successfully led Danaher's transformation from an industrial manufacturing company to a technology company. On the day he took office, GE's stock price rose as much as 16%.

After taking office, Culp has been working hard to prevent GE from becoming a junk stock. In mid-November, GE sold its $3.7 billion stake in oilfield service company Baker Hughes, and on the 16th, it sold a $1.5 billion medical equipment finance portfolio to TIAA Bank to help GE "reduce its burden." Market analysis shows that the biggest challenge Culp faces now is to revive GE's power business. Although its annual revenue reached $27 billion last year, making it one of GE's largest businesses, investors still do not recognize its value. The pressure Culp is under can be imagined.

It is understood that after the reorganization last year, General Electric only retained three main businesses, namely jet engines, generators and wind turbines. The company also considered splitting its business to save its decline.

Now, General Electric has been exposed to the shocking "financial fraud" scandal. If it is confirmed, this global giant may lose the opportunity to split and go to ruin.